UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


REGULATIONS  No.  41 

RELATIVE  TO  THE 

WAR  EXCESS  PROFITS  TAX 

IMPOSED  BY  THE 
WAR  REVENUE  ACT,  APPROVED  OCTOBER  3,  1917 


Released  for  Publication 
February  4,  1918 


Reprinted  and  Distributed  by 

The  National  City  Company 

National  City  Bank  Building,  New  York 


PHILADELPHIA,  PA. 
BOSTON,  MASS. 
BALTIMORE,  MD. 
CHICAGO,  ILL. 


CORRESPONDENT  OFFICES 


PITTSBURGH,    PA. 
ALBANY,  N.  Y. 
BUFFALO,  N.  Y. 
CLEVELAND,  O. 


WILKES-BARRE.  PA.  PORTLAND,   ORE. 


SAN  FRANCISCO,  CAL.      DETROIT,  MICH. 
NEW   ORLEANS,    LA. 


KANSAS  CITY,  MO. 
ATLANTA,  GA. 
ST.  LOUIS,  MO. 
WASHINGTON,  D.  C. 


SEATTLE,  WASH. 
LOS  ANGELES,  CAL. 
MINNEAPOLIS,  MINN. 
DENVER,  COLO. 


LONDON,  E.  C,  2;  ENG. 


s 

56 

rns.  4-1 

\9l 


INDEX 


R 


Page 
Abatement   claim  on   Form   47   when   making 
return  in  cases  of  prewar  income  being 
undeterminable      satisfactorily;      low      or 

none   H 

Accounting: 

Defective;    bearing  on    invested   capital..~23 
Adjustment    of    in    connection    with    sur- 
plus   28,  29 

Individuals: 

Books   kept  31 

Books  not  kept  31 

Ultraconservatism  in  past  year 23 

Accounts    payable    in    relation    to    invested 

capital  20 

Accounts   receivable   construed   to   be    tan- 
gible   property    21 

Additions  on  annual  balance  sheet  in  com- 
puting "invested  capital" 23 

Adjustments'  required    on    annual    balance 
sheet  of  corporations  and  partnerships  23 
Invested   capital   determined   on   basis   of 

balance  sheet  as  adjusted 24 

Affiliated  corporations  return,  etc 33,  34 

Agents     and     brokers     versus     commission 

houses  and  merchants  32 

Agents:   Nominal  capital  32 

Alaska  3 

Amortization  in  relation  to  invested  capital23 
Annual      balance      sheet       (See      "Balance 

Sheet")   23,  24,  25 

Appreciation   in  value  of  assets  in  connec- 
tion  with   invested   capital 19,  33 

Correction  of  annual  balance  sheet 24 

Tangible  property  acquired  prior  to  Jan- 
uary 1,    1914   25 

Assessment  and  collection  of  tax 34 

Parent,  subsidiary  and  affiliated  corpora- 
tions   34 

Assets    and    liabilities    in    connection    with 

invested    capital    of   individuals    31 

Averaging  invested  capital;   method   of 20 

Balance    sheet    required    annually    of    cor- 
porations   and    partnerships 25 

Corrections   necessary   23 

Invested   capital   determined   on   basis   of 

balance  sheet  as  corrected 24 

Bequest,   value   of   is   exempt   from   tax 13 

Bills    payable    in   connection   with    invested 

capital   20 

Bills    receivable    construed    to    be    tangible 

property   21 

Bonds    may    be    required    when    claim    for 
abatement   is   made   on   making   return 
in   cases    of   prewar   income    being   unde- 
terminable satisfactorily,   low  or  none. .11 
Bonded   indebtedness  versus  capital;   bear- 
ing on  invested  capital 33 

Bonds  in  relation  to  invested  capital 20,  33 

Intangible  property  paid  for  in  bonds  not 
considered  as  paid  for  in  cash  or  tan- 
gible  property   21 

Surplus   or   undivided    profits  invested   in 

tax-free    bonds    27 

Tangible   and    intangible   property;   bonds 

issued  for  mixed  aggregates  of 26 

Tangible  property;  bonds  construed  to  be  21 
Books;    defective    or    poorly    kept;    bearing 

on  invested  capital  : 23 

Adjustment  of  in  connection  with  sur- 
plus   23 

Books  of  account;  individuals  31 

Not  kept  31 

Borrowed  money  and  other  property  in  re- 
lation   to   invested   capital *>0 

Brokers;   nominal  capital  32 

Business  defined  (See  "Trade  or  Business") 
Invested  capital:    business  which  will   be 

deemed    not    to   have   nominal   capital     32 
Nominal     capital:     businesses     involving 

personal  service  32 

Capital    invested    (See    "Invested    capital") 
No  invested  capital   (See  "Nominal  capi- 
tal") 
Nominal  Capital  (See  "Nominal  capital") 
Capital    of    considerable    amount    does    not 

preclude   nominal  capital  32 

Capital  versus   "invested  capital" 23,  32 

Capitalization,  small  or  nominal;  relation  to 

invested  capital  32 

Change     of    ownership     since     January     2, 

1913  10,  22 

Change  of  ownership  since   March  3,   1917; 
invested  capital  22 


Page 
Citizens  and  residents   (See    "Individuals") 
Claim  for  abatement  when  making  return  in 
cases  of  prewar  income  being  undeter- 
minable satisfactorily;  low  or  none 11 

Class  A  income  6 

Rate  of  tax  6 

Class  B  income  6 

Rate  of  tax  6 

Classification  of  net  income  subject  to  tax  6 
Commission   merchants   versus   agents  and 
brokers  in  connection  with  nominal  and 

invested   capital   32 

Compensation    (See   "Salaries") 

Computation    of   deduction    9 

(See   also    "Deduction:    computation   of") 

Computation  of  invested  capital;  rule 23 

(See  also  "Invested  Capital") 
Computation   of  tax   (See    "Tax:    computa- 
tion of") 

Consolidations  since  January  2,  1913 10,  22 

Consolidations  since  March  3,  1917;  invest- 
ed capital  22 

Constructive  capital  for  application  of  rates  8 
Copartnerships    (See   "Partnerships") 
Copyrights    paid    in    for    stock    or    shares; 

valuation   of  25 

Correction  of  annual  balance  sheet 24 

Mixed  tangibles,  intangibles,  patents  and 

copyrights    26 

Corporations    defined    3 

Corporations: 

Affiliated    corporations   21,  34 

Balance   sheet  as  of  last  day   of  taxable 

year   to   be    submitted 25 

Corrections  required  23 

Invested  capital  determined  on  basis  of 

balance  sheet  as  corrected 24 

Business    defined    4 

All  trades  or  businesses  considered  one  4 

Consolidated  since  January  2,  1913 10,  22 

Consolidations  since  March  3,   1917 22 

Deduction;   computation  of  7 

Exempt  corporations   5 

Fiscal  year 
Invested  capital  not  satisfactorily  deter- 
minable   ...12 

Less  than  12  months'   period 9 

Partially  within  1916  9 

Foreign:  return  and  tax  liability 5 

Holding    companies    33,  34 

Income  taxable:  Classification  6 

Invested  capital  19 

Rule  for  computing  23 

(See  also  "Invested  Capital") 
Investment  of  surplus  in  securities,   tax- 
free  and  otherwise   27 

Net  income: 

Prewar  period  14 

Taxable  year  13 

Nominal  capital  (See  "Nominal  Capital") 

Parent  corporations  33,  34 

Prewar  income: 

How  determined  14 

Not  satisfactorily  determinable,  low  or 

none   10 

Reorganizations    subsequent    to    January 

2,    1913    10 

Invested   capital   for   prewar  period 22 

Reorganizations   subsequent   to   March   3, 

1917  22 

Return  33 

Liability    to    make    5 

Parent,     holding     and     affiliated     com- 
panies     33,  34 

Subsidiaries    33,  34 

Specific   deduction   6 

Subsidiaries    33,  34 

Surplus   (See   "Surplus  in   relation  to  in- 
vested capital") 
Tax: 

Assessment   and   collection  of 34 

Liability  to  pay  5 

Parent,    subsidiary  and   affiliated   com- 
panies    33,  34 

Rates   6 

Taxable  year  3 

Trade  or  business  defined 4 

All   trades   or  businesses   considered   as 

one    6 

Undivided  profits  (See  "Undivided  profits 
in   relation   to    invested   capital") 


Index — Continued 


Page 
Corrections    required    on    annual    balance 
sheet  of  corporations  and  partnerships. .23 
Invested   capital   determined   on   basis   of 

balance  sheet  as  corrected  24 

Current    liabilities    in    relation    to    invested 

capital  20 

Deduction;   computation  of  9 

Exceeding   15%    of  capital   7 

In  case  of  invested  capital  satisfactorily 

determinable    9 

Citizen  or  resident  individuals  10 

More  than  one  trade  or  business 31 

Domestic    corporations    9 

Domestic    partnerships    10 

Foreign   corporations   10 

Foreign   partnerships  10 

Nonresident   aliens    10 

More   than  one  trade   or  business 31 

In  case   of  invested   capital  not  satisfac- 
torily determinable  12 

Prewar  period  income  being  undetermin- 
able satisfactorily;   low;   or  none 10 

Reorganizations  subsequent  to  January  2, 

1913  10 

Deduction,    specific: 

Citizens  or  residents  6,  10 

Domestic  corporations  6,  9 

Domestic   partnerships   6,  10 

Foreign  corporations;  none  6 

Foreign  partnerships;  none  6 

Nonresident  aliens;  none  6 

Definitions: 

Assets  and  liabilities   in  connection  with 

invested   capital  of  individuals 31 

Corporation   3 

Dividend  5 

"Domestic"   _  3 

"Foreign"    3 

Intangible    property    21 

Money  or  other  property  borrowed 20 

Nominal   capital   32 

"Prewar    period"    4 

Tangible   property  21 

Taxable  year  3 

"Trade  or   "business": 

Corporations  and   partnerships  4 

Individuals    4 

"United   States"   4 

Depletion   in   relation   to   invested   capital. ...19 
Adjustment    of,    in   connection   with   sur- 
plus      28,  29 

Correction    necessary   on    annual   balance 
sheet 
Depreciation    in   relation    to   invested   capi- 
tal   19,  23 

Adjustment   of,    in    connection   with   sur- 
plus     28,  29 

Correction  on  annual  balance  sheet 24 

Development  of  good-will,  trade-mark,  etc., 
charged  to  current  expense;  no  read- 
justment   permitted    29 

Devises;   value  of,  is  exempt  from  tax 13 

Distributive  interests  of  partnerships  not 
taxable    to    members   of   partnerships....l9 

Dividend    d<  fined    _ 5 

Dividends  deductible: 

Individuals  17 

Corpora t  ions  13,  1 4 

Partnerships  15 

Dividends  received  from  foreign  corporation 
which    is   subject    to   income   tax. .14,  17,  21 

Domestic  corporation  defined  3 

(See  also  "Corporations") 
Equipment   originally   charged   as   expense; 

readjustment    of   surplus   account 2S 

Estimated  capital  invested  8 

Examples  of  tax  computations  (See  "Illus- 
trations") 

rcxception.il   cases;    invested  capital 22 

Exceptional    profits    because    of    the    war; 

bearing  on   invested   capital 32 

Exempt  from   tax  liability  5 

Exempt  income  13 

Exemption;  specific  (See  "Deduction;  spe- 
cific") 
Expense  involved  in  securing  data  for  com- 
putation of  invested  capital  by  foreign 
taxpayers  unreasonable  in  view  of 
amount  of  tax 


Page 

Expenses  in   relation   to   invested   capital. ...19 
Adjustment    of   book   records    in    connec- 
tion   with   surplus   _ 28 

Fee   (See    "Salaries") 
Fiscal  year: 

P'irst    return    for    less    than    12    months' 

period    9 

Invested  capital  not  satisfactorily  deter- 
minable   9,  12 

Partially  falling  within  1916 9 

Relation  to  taxable  year 3 

Fixtures    originally    charged    as     expense; 

readjustment    of   surplus    account 28 

Foreign  corporation  stock  in  relation  to  in- 
vested capital  21,  24 

Foreign  corporations: 

Deduction;   computation  of  ._ _ 10 

Definition  of  3 

Income    from    sources   within   the   United 

States    taxable    13 

Invested  capital  of;  specifically 21,  38 

Return  33 

Liability  to  make  5 

Specific  deduction;    none   „ _ 6 

Tax;  assessment  and  collection  of 34 

Liability   to  pay  5 

Foreign    dividends    13,  17,  21 

Foreign  partnership: 

Deduction;   computation  of  _ _ 10 

Income    from    sources   within    the    United 

States  taxable   13 

Invested    capital    of;    specifically 22,  23 

Return  33 

Liability  to  make  5 

Salaries  of  members  15 

Specific   deduction   6 

Tax;    assessment   and   collection    of 34 

Liability  to  pay 5 

Franchises  21 

(See  also   "Intangible  Property") 
Furniture    originally    charged    as    expense; 

readjustment  of  surplus  account 28 

Gifts  made;  deductibility  of  by  individuals .17 
Gifts  of  tangible  property,  value  of  may  be 

included  as  surplus  27 

Gifts;  value  of,  is  exempt  from  tax 13 

Good    will    21,  24,  29 

(See    "Intangible   Property") 
Government    bonds   in    relation    to   invested 

capital  20,  24,  27 

Government    bonds;    interest    from 

Issued    prior    to    September    24,    1917,    is 

exempt  from   tax  13 

Issued  subsequent  to  September  24,  1917, 
taxability    of: 

Corporations  13 

Partnerships  14 

Hawaii   considered   as   domestic 3 

Hawaii  considered  as  part  of  United  States  3 

Holding  companies   33,  34 

Illustrations  in  computation  of  tax: 

Corporations  7 

When    deductions    exceed    15%    of    in- 
vested  capital    8 

Individuals;  one  or  more  trades  or  busi- 
nesses with  invested  capital  with  sal- 
ary in  addition  17,  18 

Individuals    and    partnerships;    trade    or 

business  with   invested   capital 7 

When    deduction    exceeds    15%    of    in- 
vested  capital   8 

Income  disproportionate  to  invested  capital  23 

Income  during  prewar  period: 
How   determined: 

Corporations  14 

Individuals  18 

I  'artnershlps  18 

Not    satisfactorily   determinable;    low;    or 

none    10 

Return  of,  not  required  when 38 

Income  exempt  13 

Income  for   taxable  year  how  determined: 

Corporations  13 

individuals  18 

I  'a  rtnerships  14 

Income    subject    to    tax,    generally • 

Class  A:   No  invested  capital  or  nominal 

capital  merely  8 

Class  B:  Invested  capital  8 

Indebtedness,  bonded  versus  capitalization; 
bearing  on  invested  capital  33 


Index — Continued 


Page 
Indebtedness,    evidence  of  construed   to  be 
tangible    property    21 

Indebtedness  in  relation  to  invested  capital  20 
Adjustment   of  annual   balance   sheet 24 

Individuals: 

Accounting  records  31 

Books   not    kept   31 

Books   of   account   31 

Not   kept    iX~«l 

Change   of  ownership   of   business 10,  11 

Deduction;  computation  of  10 

Exempt   to    extent   engaged   in   certain 

businesses   or   occupations    5,  13 

Gifts  made  by,   deductibility  of 17 

Government    bonds;    interest    on 4,  13,  17 

Income   taxable: 

Classification  of  6 

How  determined  when  there  is  invested 

capital   16 

How   determined   when  there  is  no  in- 
vested    capital    or     nominal    capital 

merely  - 16 

Intangible  property;  valuation  of  in  connec- 
tion with  invested  capital 30 

Invested  capital;  how  measured 30 

Rule  for  computing  31 

Invested  capital  not  satisfactorily  deter- 
minable   12 

Returns  in  such  cases  - 12 

Investments  merely;   profits  from 4 

Isolated,  incidental  and  infrequent  trans- 
actions   ;---  | 

Married  woman  may  make  separate  ret  n33 
Nonresident    aliens    (See    "Nonresident 

aliens") 
Partnerships;  members  of 

Distributive  interests  19 

Salaries  received   from  partnership  ....16,  19 
Prewar  income: 

How  determined  when  there  is  invested 

capital  18 

Not    satisfactorily    determinable;    low; 

or  none  10 

Profits    earned   during    taxable   year    and 

retained   in  trade  or  business 30 

Reorganizations  subsequent  to  January  2, 

1913  10 

Reorganizations   subsequent  to   March    3, 

1917  22 

Returns  33 

Liability  to   make   5 

Rule  for  computing  invested  capital 31 

Salaries  considered  income  from  trade  or 
business  having  no  invested  capital  or 

nominal  capital  merely  6,  16 

Salaries   paid    to    members   of   partner- 
ships by  the   firm  16,  19 

Salaries  paid  to  selves  18 

Prewar  period  IS 

Salaries  paid  to  members  of  partnerships 

by  the  firm  16,  19 

Salaries  paid  to  selves  by  individuals 18 

Prewar  period  18 

Specific  deduction  6,  10 

Tangible    property;     valuation    of    in 

connection   with    invested    capital 30 

Tax;  assessment  and  collection  of 34 

Liability  to  pay  5 

Taxable  year  for  individuals  -  3 

Trade  or  business: 

Defined    4 

Different    businesses    separately    taxed 
according  to  classification   of   income  6 

More  than  one  trade  or  business 31 

Insurance  companies;   invested  capital  of.. ..29 
Intangible  property: 

Appreciation    in    value    of;    correction    of 

annual  balance  sheet  24 

Appreciation    in    value    through    develop- 
ment; relation  to  invested  capital 33 

Defined    21 

Development  of  having  been  charged  as 

current  expense 29 

Valuation    of   as    invested    capital    of    an 

individual  30 

Valuation   of  when   purchased  with   cash 

or  intangible  property  27 

Correction  of  annual  balance  sheet 24 

No    adjustment    of    on    account    of    sur- 
plus account  26,  27 


Pas* 

Intangible  Property: 

Payment  for  in  stock  or  bonds  not  con- 
sidered as  payment  in  cash  or  tan- 
gible  property   -2 

Valuation  of  when  purchased  with  stock 
or  shares:  „. 

Application  of  the  20%  limitation ^6 

Correction  of  annual  balance  sheet 23 

Mixed    tangibles,    intangibles,    patents 

and   copyrights    26 

Non-par   value   stock  -26 

Prior  to  March  3,    1917 26 

Interest  on  loans   to   partnership   by  mem- 
bers thereof 1" 

Interest  on  obligations  of  State  and  political 

subdivisions  thereof  is  exempt  from  tax  13 
Interest  on  obligations  of  United  States: 
Issued   prior   to    September    24,    1917;    ex- 
empt from  tax  1* 

Issued  subsequent  to  September  24,  1917; 
taxability  of: 

Corporations  1' 

Individuals  17 

Partnerships  1* 

Invested  Capital  •- —19 

Accounting;  defective  23,  28,  29 

Accounting;  ultra-conservative  23 

Adjustment  of  annual  balance  sheet 23 

Agents  and  brokers....  nominal  capital 32 

Amortization  23 

Appreciation    in    value    of    capital    assets 

19,  24,  33 
Tangible    property    acquired    prior    to 

January    1,    1914    ~ 25 

Averaging  by  months  20 

Balance     sheet    required    annually    from 

corporations   and   partnerships    25 

Corrections  necessary   23 

Invested    capital    determined    on    basis 

of  balance  sheet  as  corrected 24 

Bonds  in  relation  to  invested  capital.— 20,  33 
Surplus  or  undivided  profits  invested  in  27 
Tangible  and  intangible  property;  bonds 

issued    for    mixed    aggregate    of 26 

Businesses  which  will   not  be  deemed  to 

have  nominal  capital  32 

Capital   versus  invested  capital 23,  32 

Capital   assets;    appreciation    in   value    of 

19,  24,  33 
Tangible    property    acquired    prior    to 

January    1,    1914 25 

Capitalization  small  or  negligible;  bear- 
ing on  invested  capital  32 

Commission   houses   and  merchants 32 

Computation  of:  rule 

Corporations  and  partnerships   23 

Individuals  ------- :— 31 

Copyrights;  valuation  of  when  paid  for  in 

stock  or  shares  26 

Correction  of  annual  balance  sheet 24 

Correction  of  annual  balance  sheet 23 

Defined    as    invested    capital    of    present 

owner  1° 

Depletion  of  property  19 

Adjustment  of  in  connection  with  sur- 

rjlus  ___ _ <io,  «" 

Depreciation    of   property    19,  23 

Adjustment  of  in  connection  with  sur- 
plus  ;8 

Exceptional  cases  ......&a 

Expense  involved  in  securing  data  for 
computation  of  invested  capital  in 
case  of  foreign  taxpayers  unreason- 
able  in  view  of  amount   of  tax 23 

Expenses  incurred  :-— 19 

Adjustment  of  in  connection  with  sur- 


plus 


28 


Foreign  corporation  stock 21,  24 

Foreign  corporations  specifically  ^l,  j* 

Foreign  partnerships  specifically 21,  -3 

Good  will 29 

Correction  of  annual  balance  sheet j* 

Is  intangible  property 21 

Income  disproportionate  to  invested  cap- 
ital   23 

Indebtedness  j» 

Individuals   specifically    aO 

Rule  for  computing  31 

Insurance  campanies  &* 

Intangible  property: 

Appreciation  in  value  of  because  of  de- 
velopment, etc 24,  33 


Index — Continued 


Page 

Invested  Capital  19 

Intangible   property: 

Correction  of  annual  balance  sheet 23 

Defined    21 

Valuation  when  paid  for  in  cash  or  tan- 
gibles    27 

Payment  in  stock  or  bonds  not  con- 
sidered payment  in  cash  or  tangible 

property    21 

Valuation    when    paid    for    in    stock    or 

shares    5 

Mixed  tangibles,  intangibles,  patents, 

etc 26 

Non-par  value  stock  26 

Intangible  property;  valuation  of  as  in- 
vested  capital   of  an   individual 26 

Items  not  allowed  to  be  included 20 

Liquidation  of  original  capital  19 

Losses   sustained    19 

Adjustment  of  in  connection  with  sur- 
plus   28,  29 

Mixed  aggregate  of  tangible  and  intan- 
gible property  and  patent  and  copy- 
rights when  paid  for  in  stock  or 
shares  (or  stock  or  shares  and  bonds 

or  other  obligations)    26 

Correction  of  annual  balance  sheet 24 

Money   or  other  money   borrowed   not   to 

be  included  20 

The  term  defined   20 

Mutual  insurance  companies  29 

No  invested  capital   (See   "Nominal  Cap- 
ital") 
Nominal  capital  (See  "Nominal  Capital") 
Non-par  value  stock;   purchase  of  intan- 
gible property  therewith  26 

Nonresident  aliens  specifically  21,  23 

Not  satisfactorily  determinable  8,  12,  22 

Fiscal  year  basis  9,  12 

Returns  in  such  cases  13 

Obsolescence   of   property   19,  23 

Adjustment  of  in  connection  with  sur- 
plus   2S 

Paid    in   surplus   23,  28 

Patents   and    copyrights;    valuation   of 

when  paid  for  in  stock  or  shares 26 

Correction  of  annual  balance  sheet 24 

Prewar  period   22 

Profits  earned  during  taxable  year  in  case 

of  an   individual  30 

Profits;  exceptional  because  of  war  condi- 
tions;   luaririg    on    invested    capital. ...32 
Reorganizations    subsequent    to: 

January  2,  1913 22 

March  3,   1917 22 

Return  of  for  prewar  period  not  required; 

when  33 

Return  of  for  taxable  year  33 

Stock  issued  or  exchange  for  property, 
returned  to  corporation  as  gift  or  for 
consideration    considerably    less    than 

par  25 

Correction   of  annual  balance  sheet 24 

Stock    Insurance   companies   .30 

Stoi  i.    and    bonds   in   relation   to   invested 

capital  20,  24,  33 

Foreign  corporation  stock  21,  24 

Surplus    or    undivided    profits    invested 

in   27 

Surplus    in    relation    to   invested   capital 
_  19,  23,  27 

Earned  during  any  prewar  year 27 

Earned   during  taxable  year 27 

Invested    in    securities,    tax-free    and 

otherwise    27 

Paid-ill  surplus  23,  28 

!:.  adjustment    of  surplus   account 28,29 

Tangible  property  considered  as  sur- 
plus  when  28 

glble    property   considered   as   surplus 

when  28 

Tangible  property;  items  construed  to  be  21 
Valuation    when    paid    for    in    stock    or 

pes  25 

Correction  or  annual  balance  sheet...  24 
Mixed   tangibles,  intangibles,  patents, 

etc 26 

Tangible  properly;  valuation  of  as  in- 
vested   capital    (if    an     individual  30 

Tax-free  securities         20,24,33 

Surplus  or  undivided  profits  invested  in27 
Trade  or   business   having   invested   capi- 
tal   (See    "Invested  Capital;    trade   or 
business  having") 


Page 

Invested  Capital  19 

Undivided   profits   in   relation   to   invested 

capital    19,  23,  27 

Earned  during  any   prewar  year 27 

Earned  during  taxable  year 27 

Invested    in    securities,    tax-free    and 

otherwise   27 

Paid  in  surplus  27 

Readjustment  of  surplus  account 28,  29 

Tangible    property    considered    as    sur- 
plus   when    28 

Invested  capital:    trade  or  business  having 
Contructive  capital  for  application  of: 
rates: 

Deduction;   computation  of  9 

Tax  rates  6 

Invested  capital  versus  capital 32 

Investment    of    surplus    in    securities,    tax- 
free  and  otherwise   27 

Investments  merely;  profits  from  two  indi- 
viduals    4 

January   2,    1913;    reorganization   subse- 
quent to  10 

Invested   capital    for   prewar   period 22 

January  1,   1914;    tangible   property  paid   in 
for  stock  or  shares: 

prior  to   this  date 25 

Appreciation  in  value  of  assets  allowed  25 

Subsequent  to  this  date  25 

Judges   of   United   States;    salary  of  is   ex- 
empt  from   tax   13 

Leaseholds  construed  to  be  tangible  prop. ..21 
Life   insurance;    proceeds  are  exempt   from 

tax    13 

Limited    partnership   considered   a   corp 3 

Loans  to  partnership  by  members  thereof; 
interest  on 

Taxable  year   16 

Prewar  period  16 

Losses  in  connection  with  invested  capital. .19 
Adjustment   of  books   in  connection  with 

surplus  28 

March    3,     1917;     intangible    property    pur- 
chased with  stock  or  shares  prior  to. ...26 

Application   of  the   20%   limitation 26 

Non-par  value   stock   26 

March    3,    1917;    mixed    property    (tangible 
or  intangible)   purchased  with  stock  or 

shares    26 

March    3,    1917;    reorganization    subsequent 

to;  invested  capital  22 

Married   woman   may  make   separate  ret'n  33 
Mixed   aggregate   of   tangibles,    intangibles, 
patents,  and  copyrights  purchased  with 
or  paid  in  for  stock  or  shares  (or  stock 
or    shares   and    bonds   or   other    obliga- 
tions) ;    valuation   of 26 

Correction  of  annual  balance  sheet 24 

Money  or   other   property   borrowed   not   to 

be   included   in   invested   capital 20 

The    term   defined   20 

Mutual  insurance  companies,  invested  cap- 
ital of   29 

Net  income  subject  to  tax;  classification  of  6 
Class  A:   No  invested   capital  or  nominal 

capital   merely  %  6 

Class  B:  Invested  capital  '  6 

Net  income  subject  to  tax;  how  determined 

Corporations  13 

Individuals  16 

Nonresident  aliens  16 

1  art nerships  14 

Nominal  or  no  invested  capital 32 

Agents  and  brokers  32 

Businesses   which  will   not  be  deemed   to 

have    nominal    capital    32 

Commission   houses   and   merchants 32 

Large  capital   does  not  preclude  nominal 

invested   capital    32 

Personal    service,    occupation,    profession, 

trarle  and  business  32 

Salaries,  wages,  fees,  etc., of  individuals6,16 
Tax   rates   _  6 

Non-par  value  stock  in  connection  with  pur- 
chase of  intangible  property  with  stock26 
Nonresident  aliens. 

(See     "Individuals"     for     general     provi- 
sions) 

Deduction;   computation  of  10 

Income    from   sources   within    the    United 
States  taxable  13,  16 


Index — Continued 


Page 

Nonresident  aliens.  „„„„; 

(See     "Individuals"     for     general     provi- 
sions) .  ln 

Deduction;  computation  of :iy"y:"viu 

Income    from    source    within    the    United 

States    taxable    ------ -.--«•  \% 

Income  of  subject  to  tax;  how  determined-lb 


Page 

Correction  of  annual  balance  sheet ,24 

Mixed  tangibles,  intangibles,  patents  ana 

copyrights   """ 

Patterns  originally  charged  to  expense,  re- 
adjustment  of  surplus  account    ...-«,  ^ 

Personal    service    occupations,    professions, 
trades  and  businesses: 
Nominal   capital 


Invested  capital  of,  specifically  21       Plant  expenditures  charged  originally  to  ex- 

RMnm 62  M,M.  Fc9 ri instment  of  surplus  account2S 


of. 


5 
.18 
.  6 
.34 

..  5 
.21 


Return 

Liability   to   make   

Salaries  paid   to   selves 

Specific  deduction;   none 

Tax;    assessment   and   collection 

Liability   to  pay   ----- ---- - 

Notes  construed   to  be   tangible  property. 
Obsolescence  of  property  in  relation  to  in- 
vested capital  -- -■ 19>  %6 

Correction  of  annual  balance  sheet 24 

Adjustment  of  in  connection  with  surplus^ 

Occupations  involving   personal   service ...32 

Organizations  subsequent  to  January  2, 
1913,  which  are  substantially  a  contin- 
uation of  a  former  business 10 

Invested   capital   for   prewar   period 11 

Correction  of  annual  balance  sheet 24 

Original    capital;    liquidation    of 19 

Ownership   of   property;    income   arising 

merely   because   of    4 

Paid-in    surplus    23>  28 

Parent  corporations  33,  34 

Partial  year;  return  and  payment  of  tax  for  9 

Partnerships: 

Balance   sheet  required   annually  on   last 

day  of  taxable  year  25 

Corrections  required  -23 

Invested  capital  determined  on  basis  of 

balance  sheet  as  corrected 24 

Deduction;   computation  of  10 

Distributive    interests    not   taxable    to 

members  — 19 

Dividends  deductible    15 

Exempt  partnerships  5 

Fiscal  year   «j 

Less  than  12  months'   period 9 

Partially  within   1916  --- 9 

Foreign    partnerships:    return    and    tax- 
liability   % 

Specific   deduction;   none   *> 

Income   taxable: 

Classification   of   ■»--- « 

How  determined  for  prewar  period 15 

How  determined  for  taxable  year 14 

Interest  on  loans  by  members  to  the  firmlb 
Invested  capital  not  satisfactorily  deter- 
minable   12 

Fiscal  year  basis  12 

Returns   in   such   cases   12 

Invested   capital   1-j 

Rule  for  computing  2.J 

(See  also  "Invested  Capital") 
Investment  of  surplus  in  securities,  tax- 
free  and  otherwise   27 

Limited   partnerships   considered   as   cor- 
porations      3 

Nominal  capital  (See  "Nominal  capital") 
Prewar    income: 

How  determined  15 

Not  satisfactorily  determinable;  low;  or 

none   10 

Salaries  of,  and  interest  paid  to,  mem- 
bers   16 

Reorganizations  subsequent  to: 

January  2,  1913  22 

March  3,  1917  {% 


.21 
.10 

.24 

.22 


Returns 


33 


pense;  readjustment  of  surplus  account 
President  of  the  United  States,  salary  of  is 

exempt  from  tax  i4 

Prewar   period:  , 

Defined    ------ * 

Income  of:   how  determined: 

Corporations  -. TK""^ 

Individuals  when  there  is  invested  cap- 
ital   - }l 

Salaries  paid  to  selves  j» 

Partnerships  -- ...............ad 

Salaries    of,    and    interest    paid    to 

members    ....  ...lb,  i» 

Income    not    determinable    satisfactorily; 

low;  or  none  during  prewar  period. .27 
Invested  capital;  manner  of  determining..^ 
Surplus  earned  during  any  prewar  year..2( 

Professions;   nominal  capital   --- 6* 

Profits  earned  during  taxable  year  and  re- 
tained in  business  in  case  of  mdividual30 
(See   "undivided  profits"   for  corporations 

and   partnerships)  

Profits,    exceptional  because  of  war  condi- 
tions;  bearing  on  invested  capitalL..^-' 
Promissory  notes  construed  to  be  tangible 

property    -- S"""Voia 

Reorganizations    since    January    2,    I9id 

Correction   of  annual  balance  sheet 

Invested   capital   for   prewar   period     . 
Reorganization    since    March    3,    1917,    in- 
vested capital  — ----- — ; " 

Correction  of  annual  balance   sheet £i 

Returns  o 

"tpi  af»Q  i    vGur - ----- o 

Less   than   the  "regular  12   mos\    period  9 

Partially  falling  within  1916 •••"■' 

Holding  companies  ............ ----;»*»  ** 

Invested  capital  not  satisfactorily   deter- 
minable;  returns  in  such   cases 12 

Liability   to   make   return: 

Citizens   and   residents   j> 

Domestic  corporations  «? 

Domestic  partnerships  •? 

Foreign  corporations   - j} 

Foreign  partnerships  » 

Nonresident    aliens *~"~;v~«l 

Married  woman  may  make  separate  retndd 

Parent  corporations  6%6l 

Period  covered   -- 6>  ' 

Statement   of  proposed  additions   to   sur- 
plus on  account  of  readjustments   to 

be  included  on  return  "ooQd 

Subsidiaries    ia>  6i 

Taxable  year  ----- -- ------- v-i—  x 

Fiscal  year  partially  falling  within  191b  9 
Less   than   the   regular   12   mos.     period  9 
Rule    for    computing    invested    capital: 

Corporations  and  partnerships  ^ 

Individuals    -■ V" '"JT""™ 

Salaries   considered    income    from   trade   or 
business  having  no  invested  capital  or 

nominal  capital  only  «>,  ±t> 

Exempt  salaries  -.- -• i'";"~a 

Minimum    amounts    received    as    salaries 

taxable       * 

Partnerships -"salaries  of  members  of  16,  19 

Self;    salary   paid  to •■ f? 

United  States,   State,   etc.,   employees....... 


°"  United   aiaies,    owic,    ^.,    -"r--^-:- 

Liability  to  make  5       salaries    paid    members    of    partnership    by 


Salaries  of  members: 

Deductible  by  firm  !•> 

Prewar  period  ----- --*» 

Taxable  to  members  16,  19 

Specific  deduction  ------ 6,  10 

Tax;    assessment   and   collection   of 34 

Liability  to  pay  5 

Taxable  year  » 

Income  of,  how  determined  14 

Trade   or  business: 

All   trades  or  businesses  considered   as 
one    ^ 

Defined   - 4 

Patents   and   copyrights   paid    in   for   stock 

or  shares;   valuation   of 2b 


the   firm: 

Deductible  by  firm   - ™ 

Foreign  partnerships  J" 

Prewar  period i«"io 

Taxable   to  members  J-°.  j£ 

Salary  paid  to  self " 

Nonresident    aliens    " 

Prewar  period   - ------- —•— — xo 

Securities   in  relation  to  invested  capita^   ^ 

Foreign  corporation  stock •:-v2V  24 

Surplus   or   undivided   profits   invested   in 

securities  tax-free  and  otherwise  £1 
Tangible  property;  securities  construed  to 

be    21 


Index — Continued 


Page 
Services:    occupations,    professions,    trades, 
businesses,    involving    personal   service: 

nominal  capital  32 

Specific  exemption  or  deduction   (See   "De- 
duction: specific") 
State,   etc.,   employees;   salaries  of  are   ex- 
empt  from   tax   13 

State    obligations;    interest    on    is    exempt 

from    tax   13 

(See  also   "Tax-free   securities") 
Stock    or    shares    issued    or    exchange    for 
property: 
Correction    of    annual    balance    sheet    in 

connection   with   23 

Intangible  property:  valuation  of  26 

Application  of  20%  limitation  26 

Non-par  value   stock   26 

Payment  made  in  stock  not  considered 
as  payment  made  in  cash  or  tan- 
gible  property   21 

Mixed  tangibles,  intangibles,  patents  and 

copyrights    26 

Patents  and  copyrights;   valuation  of 26 

Stock  returned  to  corporation  as  gift  or 
for     consideration     considerably     less 

than  par  24 

Tangible   property;  valuation  of 25 

Stock  insurance  companies;   invested  capi- 
tal of  30 

Stock   without   par   value;    purchase   of   in- 
tangible property   therewith 26 

Stocks  and  bonds   in   relation   to  invested 

capital    20,  24,  33 

Foreign  corporation  stock  21,  24 

Government   bonds   20,  27 

Surplus   or   undivided   profits   invested   in 

securities,  tax-free  and  otherwise  20,  27 
Tangible  property;  stocks  and  bonds  con- 
strued   to    be    21 

Subsidiaries    33,  34 

Subtractions    on    annual    balance    sheet    in 

computing,    "invested   capital"    23 

Surplus  in   relation   to  invested  capital 

19,  23,  27 

Earned  during  taxable  year 27 

Earned  during  any  prewar  year 27 

Government    bonds;    investments    in. ...20,  27 
Individuals;  profits  earned  during  taxable 

year    and    retained    in    business 30 

Invested  in  tax-free  and  other  securities 

20,  27 

Paid-in    surplus    23,  28 

Readjustment  of  surplus  account  28,  29 

Tangible  property: 
Cost   of  originally  charged   to   expense; 
readjustment  of  surplus  account  2S.29 

When   to  be  included  as  surplus 28 

Tangible  property: 
Appreciation    in    value    of:    correction    of 

annual  balance  sheet  24 

Cost  of  originally  charged  to  expense; 
readjustment  of  surplus  account....28,  29 

Intangible  purchased  with  27 

Items   construed   to   be   21 

Purchased  for  nominal  sum;  excess  of 
value  over  purchase  price  may  be  in- 
cluded as  surplus  28 

Surplus:   when   tangible  property  may  be 

ini  hided  as  28 

Valuation  of  as  invested  capital  of  indi- 
vidual   30 

Valuation  of  when  purchased  with  stock 
or  shares: 

Correction  of  annual  balance   sheet 24 

Mixed  aggregate  of  tangibles,  intan- 
gibles, patents  and  copyrights 26 

Prior  to  January  1,  1914 

Subsequent    to   January    1,    1914 25 

Tax:  assessment  and  collection  of 34 

Parent,  subsidiary,  and  affiliated  com- 
panies    33,  34 

Tax:   computation   of  6 

e  capital  invested  8 

Deduction  exceeding  15%  of  capital  in- 
vested      7 

Fiscal   year   partially    within   1916 9 

Illustrations: 

Corporations  7 

When    deduction   exceeds   15%    of   in- 
vested  capital  -  8 

Individuals   and    partnerships;    trade   or 

business  with   invested   capital 7 

When   deduction    exceeds   15%   of  in- 
vested  capital   _ 8 


Pag« 
Individuals;  one  or  more  trades  or  busi- 
nesses   with    invested    capital    with 

salary  in  addition  17,  18 

Tax:  computation  of  _ 6 

In  case  of  invested  capital 6 

In  case  of  no  invested  capital  or  nominal 

capital  merely  _ 6 

Less  than  12  months'  period _ 9 

Tax-free  securities  20,  24,  33 

Surplus  or  undivided  profit  invested  in. ...27 

Tax  liability  __ 6 

Citizens   and   residents   _ S 

Corporations  _ _ S 

Foreign   corporations   ~ _ 5 

Exemptions  _ _ 6 

Nonresident  aliens  6 

Partnerships  i 

Foreign  partnerships  S 

Tax  rates: 

In  case  of  invested  capital 6 

In   case   of   no   invested   capital   or   nom- 
inal capital  merely 6 

Taxable  year: 

Fiscal  year  partially  falling  within  1916....  9 
First    return    for    less    than    12    months' 

period  9 

Income  of   determined   how: 

Individuals  _ 16 

Corporations  13 

Partnerships  14 

Surplus  earned  during  _ 27 

Profits  in  case  of  individual „ 30 

Taxes  paid  within  calendar  years  1911, 
1912  and  1913  by  corporations  to  be  in- 
cluded  in   taxable    income 14 

Tools  originally  charged  as  expense;  read- 
justment or  surplus  account  28 

Trade  brands  -.21 

(See  also   "Intangible   property") 

Trade-marks  are   intangible   property 21 

(See  also  "Intangible  property") 
Trade   or  business  defined: 

Corporations  and  partnerships  4 

All   trades  or  businesses  considered   as 

one  6 

Individuals  4 

Different  business  separately  taxed  ac- 
cording to  classification  of  income..  6 
Distributive    interests    of    members    of 

partnerships   19 

More   than  one  trade   or  business 31 

Salaries,  wages,  compensations,  etc. 6, 16, 18 

Members   of   partnerships   16,  19 

Invested  capital  business  in  general 33 

Nominal  capital  business  in  general 32 

Personal  service;   nominal  capital 32 

Twenty    per    cent    limitation    on    intangible 

property  purchased  with  stock  or  shares26 
Undivided    profits    in    relation    to    invested 

capital  19,  23,  27 

(See     "Surplus    in    relation    to     invested 
capital") 
United   States  bonds  in  relation  to  invest- 
ed  capital   20,  27 

United    States    bonds;    interest    on    (See 
"Government  bonds") 

"United  States"   defined  8 

Valuation    of    intangible    asset    purchased 

with  cash  or  tangible  property 27 

Appreciation  in  value  of  through  devolp- 

ment;  bearing  on  invested  capital 33 

Correction  of  annual  balance  sheet 24 

Valuation  of  property  paid  for  in  stock  or 
shares: 

Correction  of  annual  balance  sheet 23 

Intangibles  26 

Appreciation   through  development; 

bearing  on   invested   capital 33 

Stock  without  par  value  25 

Mixed  tangibles,  intangibles,  patents  and 

copyrights  26 

Patents  and  copyrights  26 

Stock  returned   to  corporation   as  gift  or 
for   consideration    considerably   below 

par  25 

Tangible   25 

War:  exceptional  profits:  bearing  on  in- 
vested capital  32 

War:  inability  to  recognize  amortization, 
obsolescence,  or  exceptional  deprecia- 
tion because  of  28 

Year:  taxable  3 

Fiscal  year  partially  falling  within  1916....  9 
Return   for  less  than   12   month'    period...  9 


REGULATIONS  No.  41 

RELATIVE  TO  THE 

WAR  EXCESS  PROFITS  TAX 

Imposed  by  Title  II,  Act  of  October  3,  1917. 


TABLE    OF   CONTENTS. 

Articles 

Definitions    ~     1-  9 

Corporations,  partnerships,  and  individuals  subject  to  the  tax 10-13 

Rates  and  computation  of  tax — 14-20 

Computation  of  the  deduction 21-24 

Net  income — General   provisions   25-27 

Net  income — Corporations   _ 28-29 

Net  income — Partnerships    30-34 

Net  income — Individuals  - 35-41 

Invested  capital — General  provisions  42-52 

Invested  capital — Corporations    and    partnerships 53-65 

Invested  capital — Individuals  - 66-70 

Nominal  capital    _ _ 71-74 

Returns    . „ _..  75-78 

Assessment  and  collection „ 79 


DEFINITIONS. 

Article  1.  Definitions. — When  used  in  these  regulations  the  terms 
defined  in  articles  2  to  9,  inclusive,  shall,  unless  otherwise  indicated 
by  the  context,  be  deemed  to  be  used  only  with  the  scope  or  mean- 
ing ascribed  to  them  respectively  in  such  articles. 

Art.  2.  Corporation. — The  term  "corporation"  includes  joint- 
stock  companies  or  associations,  no  matter  how  created  or  organ- 
ized, insurance  companies,  and  limited  partnerships. 

Art.  3.  Domestic  and  foreign. — The  term  "domestic"  means 
created  under  the  law  (statutory  or  other)  of  the  United  States  or 
any  State  thereof,  Alaska,  Hawaii,  or  the  District  of  Columbia,  and 
the  term  "foreign"  means  created  under  the  law  (statutory  or  other) 
of  any  other  possession  of  the  United  States  or  of  any  foreign 
country  or  government. 

Art.  4.  United  States.— The  term  "United  States"  (when  used  in 
a  geographical  sense)  means  only  the  States  thereof,  Alaska,  Ha- 
waii, and  the  District  of  Columbia. 

Art.  5.  Taxable  year. — The  term  "taxable  year"  means  the  12 
months  ending  December  31  of  each  year,  except  in  the  case  of  a 


4  WAR  EXCESS  PROFITS  TAX 

corporation  or  partnership  which  has  fixed  its  own  fiscal  year,  in 
which  case  it  means  such  fiscal  year.  The  first  taxable  year  is  the 
year  ending  December  31,  1917,  except  that  in  the  case  of  a  corpora- 
tion or  partnership  which  has  fixed  its  own  fiscal  year,  the  first 
taxable  year  is  the  fiscal  year  ending  during  the  calendar  year  1917. 
(For  special  provisions  as  to  prorating  the  amount  of  tax  due  for 
the  portion  of  any  fiscal  year  ending  during  the  calendar  year  1917, 
see  articles  19  and  20.) 

Art.  6.  Prewar  period. — The  term  "prewar  period"  means  the 
calendar  years  1911,  1912,  and  1913,  or  if  a  corporation  or  partner- 
ship was  not  in  existence  or  an  individual  was  not  engaged  in  the 
trade  or  business  during  the  whole  of  such  three  years,  then  as 
many  of  such  years  during  the  whole  of  which  the  corporation  or 
partnership  was  in  existence  or  the  individual  was  engaged  in  the 
trade  or  business. 

Art.  7.  "Trade,"  "business,"  "trade  or  business"  in  case  of  corpo- 
rations and  partnerships. — In  the  case  of  a  corporation  or  partner- 
ship all  income  from  whatever  source  derived  is  deemed  to  be  re- 
ceived from  its  trade  or  business,  and  the  terms  "trade,"  "business," 
and  "trade  or  business"  include  all  sources  of  income. 

Art.  8.  "Trade"  in  the  case  of  individuals. — In  the  case  of  an 
individual,  the  terms  "trade,"  "business,"  and  "trade  or  business" 
comprehend  all  his  activities  for  gain,  profit,  or  livelihood,  entered 
into  with  sufficient  frequency,  or  occupying  such  portion  of  his 
time  or  attention  as  to  constitute  a  vocation,  including  occupa- 
tions and  professions.  When  such  activities  constitute  a  vocation 
they  shall  be  construed  to  be  a  trade  or  business  whether  continu- 
ously carried  on  during  the  taxable  year  or  not,  and  all  the  income 
arising  therefrom  shall  be  included  in  his  return  for  excess-profits 
tax. 

In  the  following  cases  the  gain  or  income  is  not  subject  to  excess- 
profits  tax,  and  the  capital  from  which  such  gain  or  income  is  de- 
rived shall  not  be  included  in  "invested  capital":  (a)  Gains  or  profits 
from  transactions  entered  into  for  profit,  but  which  are  isolated, 
incidental,  or  so  infrequent  as  not  to  constitute  an  occupation,  and 
(b)  the  income  from  property  arising  merely  from  its  ownership, 
including  interest,  rent,  and  similar  income  from  investments  except 
in  those  cases  in  which  the  management  of  such  investments  really 
constitutes  a  trade  or  business. 


WAR  EXCESS  PROFITS  TAX  5 

Art.  9.  "Dividend." — The  term  "dividend"  has  the  same  meaning 
as  in  section  31  of  the  act  of  September  8,  1916,  as  amended  by  the 
act  of  October  3,  1917.    (See  Income  Tax  Regulations,  art.  106.) 

CORPORATIONS,  PARTNERSHIPS,  AND  INDIVIDUALS  SUBJECT 

TO  THE  TAX. 

Art.  10.  Corporations. — Every  domestic  corporation  which  has  for 
the  taxable  year  a  net  income  of  $3,000  or  more  is,  unless  exempt 
under  article  13,  required  to  make  a  return  and  to  pay  the  tax,  if  any. 

Every  foreign  corporation  which  has  for  the  taxable  year  a  net 
income  of  $3,000  or  more  from  sources  within  the  United  States  is, 
unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Art.  11.  Partnerships. — Every  domestic  partnership  which  has  for 
the  taxable  year  a  net  income  of  $6,000  or  more  is,  unless  exempt 
under  article  13,  required  to  make  a  return  and  to  pay  the  tax,  if 
any. 

Every  foreign  partnership  which  has  for  the  taxable  year  a  net  in- 
come of  $3,000  or  more  from  sources  within  the  United  States  is, 
unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Art.  12.  Individuals. — Every  citizen  or  resident  of  the  United 
States  who  has  for  the  taxable  year  an  aggregate  net  income  in 
excess  of  $6,000  from  trades,  businesses,  occupations  or  professions 
is,  unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Every  nonresident  alien  individual  who  has  for  the  taxable  year 
an  aggregate  net  income  of  $3,000  or  more  from  trades,  businesses, 
occupations,  or  professions  carried  on  within  the  United  States  is, 
unless  exempt  under  article  13,  required  to  make  a  return  and  to 
pay  the  tax,  if  any. 

Art.  13.  Exemptions. — The  following  are  exempt  from  the  tax : 

(a)  Corporations  exempt  under  the  provisions  of  section  11  of 
Title  I  of  the  act  of  September  8,  1916,  from  the  tax  imposed  by 
such  title.     (See  Income  Tax  Regulations,  arts.  67,  ff.) 

(b)  Partnerships  carrying  on  or  doing  the  same  kind  of  business 
or  coming  within  the  same  description. 

(c)  Individuals  to  the  extent  that  they  carry  on  or  do  the  same 
kind  of  business  or  come  within  the  same  description. 


6  WAR  EXCESS  PROFITS  TAX 

RATES  AND  COMPUTATION  OF  TAX. 
Art.  14.  Classification  of  net  income. — For  the  purposes  of  the 
excess  profits  tax  net  income  which  is  subject  to  the  tax  shall  be 
divided  into  two  classes,  as  follows : 

A.  Net  income  which  is  derived  from  a  trade  or  business  having 
no  invested  capital,  or  not  more  than  a  nominal  capital,  including 
in  the  case  of  an  individual  salaries,  wages,  fees,  or  other  compensa- 
tions; and 

B.  Net  income  which  is  derived  from  a  trade  or  business  having 
invested  capital. 

In  the  case  of  a  corporation  or  partnership,  all  the  trades  and 
businesses  in  which  it  is  engaged  will  be  treated  as  a  single  trade 
or  business  (as  provided  in  sec.  201),  and  its  entire  income  will  be 
held  to  be  of  the  same  class  as  the  income  from  its  principal  trade 
or  business. 

In  the  case  of  an  individual  the  net  income  subject  to  the  excess 
profits  tax  shall  be  classified  as  provided  in  this  article.  Net  in- 
come of  class  A  shall  be  taxed  as  provided  in  article  15,  and  net 
income  of  class  B  shall  be  taxed  as  provided  in  article  16. 

Art.  15.  Rate  of  tax  on  income  of  class  A. — The  tax  upon  net 
income  of  class  A  as  defined  in  article  14  shall  be  computed  at  the 
rate  of  8  per  cent  upon  the  amount  thereof  in  excess  of  $3,000  in  the 
case  of  a  domestic  corporation;  upon  the  amount  thereof  in  excess 
of  $6,000  in  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resi- 
dent of  the  United  States ;  and  upon  the  whole  thereof  in  the  case  of 
a  foreign  corporation  or  partnership  or  of  a  nonresident  alien  in- 
dividual. 

Art.  16.  Rate  of  tax  on  income  of  class  B. — The  tax  upon  net 
income  of  class  B  as  defined  in  article  14  shall,  except  as  otherwise 
provided  in  article  17,  be  computed  at  the  following  rates: 

20  per  cent  of  the  amount  of  the  net  income  in  excess  of  the 
deduction  (determined  as  provided  in  articles  21,  23,  and  24) 
and  not  in  excess  of  15  per  cent  of  the  invested  capital  for  the 
taxable  year; 

25  per  cent  of  the  amount  of  the  net  income  in  excess  of  15 
per  cent  and  not  in  excess  of  20  per  cent  of  such  capital ; 

35  per  cent  of  the  amount  of  the  net  income  in  excess  of  20 
per  cent  and  not  in  excess  of  25  per  cent  of  such  capital ; 

45  per  cent  of  the  amount  of  the  net  income  in  excess  of  25 
per  cent  and  not  in  excess  of  33  per  cent  of  such  capital ; 

60  per  cent  of  the  amount  of  the  net  income  in  excess  of  33 
per  cent  of  such  capital. 


WAR  EXCESS  PROFITS  TAX  7 

Illustrations.— (1)  A  corporation  has  a  capital  of  $100,000,  prewar  earn- 
ings of  7  per  cent,  and  a  net  income  for  the  taxable  year  of  $75,000. 

The  deduction  allowed  will  be  7  per  cent  of  the  capital,  or  $7,000,  plus 
$3,000  specific  deduction,  a  total  of  $10,000. 

The  amount  of  the  net  income  taxable  at  each  rate  will  be  as  follows: 
In  excess  of  the  deduction  and  not  in  excess  of  15  per  cent  of  the 

capital  (rate,  20  per  cent) $5,000 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per 

cent  thereof  (rate,  25  per  cent) 5,000 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per 

cent  thereof  (rate,  35  per  cent) 5,000 

In  excess  of  25  per  cent  of  the  capital  and  not  in  excess  of  33  per 

cent  thereof  (rate,  45  per  cent) 8,000 

In  excess  of  33  per  cent  of  the  capital  (rate,  60  per  cent) 42,000 

The  tax  would  then  be  computed  as  follows: 

20  per  cent   of  $5,000 $1,000 

25  per  cent  of  $5,000 1,250 

35  per  cent  of  $5,000 1,750 

45  per  cent  of  $8,000 3,600 

60  per  cent  of  $42,000 25,200 

Total  tax $32,800 

(2)  An  individual  or  partnership  has  a  capital  of  $100,000,  prewar  earnings 
of  8  per  cent,  and  a  net  income  for  the  taxable  year  of  $22,500. 

The  deduction  allowed  will  be  8  per  cent  of  the  capital,  or  $8,000,  plus 
$6,000  specific  deduction,  a  total  of  $14,000. 

The  amount  of  the  net  income  taxable  at  each  rate  will  be  as  follows: 
In  excess  of  the  deduction  and  not  in  excess  of  15  per  cent  of  the 

capital  (rate,  20  per  cent) $1,000 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per 

cent  thereof  (rate,  25  per  cent) 5,000 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per 

cent  thereof  (rate,  35  per  cent) 2,500 

The  tax  would  then  be  computed  as  follows: 

20  per  cent  of  $1,000 $   200 

25  per  cent   of  $5,000 1,250 

35   per  cent   of  $2,500 875 

Total  tax $2,325 

Art.  17.  When  deduction  exceeds  15  per  cent  of  invested  capital. 
— In  any  case  in  which  the  deduction  determined  as  provided  in 
articles  21,  23,  and  24  is  greater  than  15  per  cent  of  the  invested 
capital  and  therefore  can  not  be  fully  allowed  under  the  first  rate  or 
bracket  of  article  16,  then  any  remaining  portion  of  the  deduction 
will  be  allowed  under  the  second  bracket,  and  continued  if  necessary 
into  the  succeeding  bracket  or  brackets  until  the  entire  amount  of 
the  deduction  is  allowed. 

Illustrations. — (1)  A  corporation  has  a  capital  of  $9,000;  prewar  earnings 
of  9  per  cent;  and  a  net  income  for  the  taxable  year  of  $10,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital,  or  $810,  plus 
$3,000  specific  deduction,  a  total  of  $3,810. 


g  WAR  EXCESS  PROFITS  TAX 

The  amount  of  the  net  income  in  each  bracket  will  be  as  follows: 

15  per  cent  of  the  capital $1,350 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per 

cent   thereof  45° 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per 

cent  thereof  450 

In  excess  of  25  per  cent  of  the  capital  and  not  in  excess  of  33  per 

cent  thereof  720 

In  excess  of  33  per  cent  of  the  capital 7,030 

It  is  evident  that  the  total  deduction  of  $3,810  is  greater  than  15  per  cent 
of  the  capital  and  so  is  not  fully  absorbed  by  the  amount  of  net  income  not 
in  excess  of  15  per  cent  of  the  capital.  In  such  case,  applying  article  17,  the 
total  deduction  of  $3,810  will  be  distributed  as  follows: 

$1,350  in  the  first  bracket,  leaving  nothing  to  be  taxed  at  the  20  per  cent  rate. 
$450  in  the  second  bracket,  leaving  nothing  to  the  taxed  at  the  25  per  cent  rate. 
$450  in  the  third  bracket,  leaving  nothing  to  be  taxed  at  the  35  per  cent  rate. 
$720  in  the  fourth  bracket,  leaving  nothing  to  be  taxed  at  the  45  per  cent  rate. 
There  still  remains  $840  of  the  deduction  to  be  allowed  in  the  fifth  bracket 
against  the  $7,030  of  income  which  would  otherwise  be  taxable  under  that 
bracket.  There  would  then  be  $6,190  of  net  income  left  to  be  taxed  at  the 
60  per  cent  rate  under  the  fifth  bracket.  Hence,  the  total  excess-profits  tax 
in  this  case  would  be  $3,714. 

(2)  An  individual  or  partnership  has  a  capital  of  $40,000;  prewar  earnings 
of  9  per  cent,  and  a  net  income  for  the  taxable  year  of  $12,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital,  or  $3,600,  plus 
$6,000  specific  deduction,  a  total  of  $9,600. 

The  amount  of  the  net  income  in  each  bracket  will  be  as  follows: 

15  per  cent  of  the  capital $6,00C 

In  excess  of  15  per  cent  of  the  capital  and  not  in  excess  of  20  per 

cent   thereof    2,000 

In  excess  of  20  per  cent  of  the  capital  and  not  in  excess  of  25  per 

cent   thereof   2,000 

In  excess  of  25  per  cent  of  the  capital  and  not  in  excess  of  33  per 

cent   thereof    , 2,000 

It  is  evident  that  the  total  deduction  of  $9,600  is  greater  than  15  per  cent 
of  the  capital  and  so  is  not  fully  absorbed  by  the  amount  of  net  income  not 
in  excess  of  15  per  cent  of  the  capital.  In  such  case,  applying  article  17,  the 
total  deduction  of  $9,600  will  be  distributed  as  follows: 

$6,000  in  the  first  bracket,  leaving  nothing  to  be  taxed  at  the  20  per  cent  rate. 
$2,000  in  the  second  bracket,  leaving  nothing  to  be  taxed  at  the  25  per  cent 

rate. 
$1,600,  the  balance  of  the  deduction,  to  be  allowed  against  the  $2,000  of  in- 
come in  the  third  bracket. 

There  would  then  be  $400  of  income  left  in  the  third  bracket  to  be  taxed 
at  the  35  per  cent  rate,  and  $2,000  in  the  fourth  bracket  to  be  taxed  at  the 
45  per  cent  rate.  Hence,  the  total  excess-profits  tax  in  this  case  would  be 
$1,040. 

Art,  18.  Constructive  Capital  for  Application  of  Rates. — Where 
the  deduction  allowed  to  a  taxpayer  is  determined  under  article  24. 
the  invested  capital  for  the  purpose  of  applying-  the  rates  of  taxation 


WAR  EXCESS  PROFITS  TAX  9 

under  article  16  shall  be  deemed  to  be  an  amount  which  bears  the 
same  ratio  to  the  net  income  of  the  trade  or  business  for  the  taxable 
year  which  the  average  invested  capital  for  the  corresponding 
calendar  year  of  representative  corporations,  partnerships,  and  in- 
dividuals engaged  in  a  like  or  similar  trade  or  business  bears  to  their 
average  net  income. 

The  Commissioner  of  Internal  Revenue  in  determining  for  any 
calendar  year  the  ratio  which  the  average  invested  capital  of  rep- 
resentative corporations,  partnerships,  and  individuals  engaged  in 
any  particular  trade  or  business  bears  to  their  average  net  income, 
will  include  the  invested  capital  and  net  income  of  representative 
corporations  and  partnerships  for  fiscal  years  ending  during  such 
calendar  year. 

For  the  purpose  of  applying  this  article  in  the  case  of  a  corpora- 
tion or  partnership  which  has  fixed  its  own  fiscal  year,  the  ratio 
determined  for  the  calendar  year  ending  during  such  fiscal  year  shall 
be  used. 

Art.  19.  Computation  of  tax  for  fiscal  year,  part  of  which  falls 
within  calendar  year  1916. — If  a  corporation  or  partnership  prior  to 
March  1,  1918,  makes  a  return  for  a  fiscal  year,  part  of  which  falls 
within  the  calendar  year  1916,  the  tax  for  the  first  taxable  year  shall 
be  that  proportion  of  the  tax  computed  upon  the  net  income  for 
such  fiscal  year  which  the  number  of  months  from  January  1,  1917, 
to  the  end  of  such  fiscal  year  bears  to  the  entire  number  of  months 
in  such  fiscal  year. 

Art.  20.  Computation  of  tax  for  period  of  less  than  12  months. — 
If  a  corporation  or  partnership  at  any  time,  either  because  it  has 
just  designated  a  fiscal  year  as  provided  in  sections  8  or  13  of  the 
act  of  September  8,  1916  (see  Income  Tax  Regulations,  arts.  31 
and  211),  or  for  any  other  reason,  makes  a  return  for  a  period  of 
less  than  12  months,  the  deduction  will  be  an  amount  which  bears 
the  same  ratio  to  the  deduction  allowable  for  a  full  year  as  the 
number  of  months  in  such  period  bears  to  12  months. 

COMPUTATION   OF  THE   DEDUCTION. 

Art.  21.  Trade  or  business  having  invested  capital. — The  de- 
duction used  in  computing  the  rates  of  tax  under  article  16  shall, 
except  in  cases  coming  within  the  conditions  specified  in  articles  23 
and  24,  be  as  follows : 

(a)  In  the  case  of  a  domestic  corporation  the  sum  of  (1)  an 
amount  equal  to  the  same  percentage  of  the  invested  capital  for  the 
taxable  year  which  the  average  amount  of  the  annual  net  income  of 


10  WAR  EXCESS  PROFITS  TAX 

the  trade  or  business  during  the  prewar  period  was  of  the  invested 
capital  for  the  prewar  period  (except  that  7  per  cent  shall  be  used 
if  such  percentage  was  less  than  7  per  cent  and  9  per  cent  shall  be 
used  if  such  percentage  was  more  than  9  per  cent  and  8  per  cent 
shall  be  used  if  the  corporation  was  not  in  existence  during  the  whole 
of  at  least  one  calendar  year  during  the  prewar  period),  and  (2) 
$3,000. 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resident 
of  the  United  States,  the  sum  of  (1)  an  amount  equal  to  the  same 
percentage  of  the  invested  capital  for  the  taxable  year  which  the 
average  amount  of  the  annual  net  income  of  the  trade  or  business 
during  the  prewar  period  was  of  the  invested  capital  for  the  prewar 
period  (except  that  7  per  cent  shall  be  used  if  such  percentage  was 
less  than  7  per  cent,  and  9  per  cent  shall  be  used  if  such  percentage 
was  more  than  9  per  cent,  and  8  per  cent  shall  be  used  if  the  partner- 
ship was  not  in  existence  or  the  individual  was  not  engaged  in  the 
trade  or  business  during  the  whole  of  at  least  one  calendar  year 
during  the  prewar  period),  and  (2)  $6,000. 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  non- 
resident alien  individual,  an  amount  equal  to  the  same  percentage  of 
the  invested  capital  for  the  taxable  year  which  the  average  amount 
of  the  annual  net  income  of  the  trade  or  business  during  the  prewar 
period  was  of  the  invested  capital  for  the  prewar  period  (except  that 
7  per  cent  shall  be  used  if  such  percentage  was  less  than  7  per  cent, 
and  9  per  cent  shall  be  used  if  such  percentage  was  more  than  9  per 
cent ;  and  8  per  cent  shall  be  used  if  the  corporation  or  partnership 
was  not  in  existence  or  the  individual  was  not  engaged  in  the  trade 
or  business  during  the  whole  of  at  least  one  calendar  year  during  the 
prewar  period). 

Art.  22.  Trade  or  business  reorganized  on  or  after  January  2, 
1913. — If  a  trade  or  business  carried  on  by  a  corporation,  partnership 
or  individual  was  formally  organized  or  reorganized  on  or  after  Jan- 
uary 2, 1913,  but  is  substantially  a  continuation  of  a  trade  or  business 
carried  on  prior  to  that  date,  then  the  corporation  or  partnership 
shall  be  deemed  to  have  been  in  existence,  or  the  individual  shall  be 
deemed  to  have  been  engaged  in  the  trade  or  business,  prior  to  that 
date,  and  for  the  purpose  of  computing  the  deduction  the  net  income 
and  invested  capital  of  the  predecessor  shall  be  deemed  to  have  been 
the  net  income  and  invested  capital  of  the  present  owner  for  the 
prewar  period. 

Art.  23.  When  income  for  prewar  period  can  not  be  satisfactorily 
determined,  or  when  net  income  was  low  during  prewar  period,  or 


WAR  EXCESS  PROFITS  TAX  11 

when  there  was  no  net  income  during  prewar  period. — In  the  follow- 
ing cases  the  deduction  shall  be  determined  as  provided  in  this 
article  : 

(a)  If  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to  de- 
termine the  average  amount  of  annual  net  income  of  the  trade  or 
business  for  the  prewar  period; 

(b)  If  the  Secretary  of  the  Treasury  upon  complaint  finds  that 
during  the  prewar  period  the  percentage  of  the  net  income  to  the 
invested  capital  of  the  taxpayer  was  lower  by  one  per  cent  or  more 
than  the  percentage  of  the  net  income  to  the  invested  capital  of 
representative  corporations,  partnerships  or  individuals  engaged  in 
a  like  or  similar  trade  or  business  during  the  same  period. 

(c)  If,  in  the  case  only  of  a  domestic  corporation  or  partnership 
which  was  in  existence  during  the  prewar  period,  or  of  a  citizen  or 
resident  of  the  United  States  who  was  engaged  in  the  trade  or  busi- 
ness during  the  prewar  period,  the  Secretary  of  the  Treasury  upon 
complaint  finds  that  during  the  prewar  period  there  was  no  net  in- 
come from  the  trade  or  business. 

In  such  cases  the  deduction  shall  be — 

(1)  An  amount  equal  to  the  same  percentage  of  the  invested 
capital  for  the  taxable  year  which  the  average  deduction  (deter- 
mined in  the  same  manner  as  provided  in  article  21,  without  includ- 
ing the  $3,000  or  $6,000  therein  referred  to)  for  such  year  of  repre- 
sentative corporations,  partnerships,  or  individuals  engaged  in  a 
like  or  similar  trade  or  business,  is  of  their  average  invested  capital 
for  such  year,  plus. 

(2)  In  the  case  of  a  domestic  corporation,  $3,000,  and  in  the  case 
of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United 
States,  $6,000. 

In  cases  arising  under  subdivision  (a)  or  (c)  of  this  article  the  tax 
shall  be  assessed  in  the  first  instance  upon  the  basis  of  a  deduction 
computed  by  the  use  of  7  per  cent.  In  cases  arising  under  sub- 
division (b)  the  tax  shall  be  assessed  in  the  first  instance  upon  the 
basis  of  a  deduction  determined  as  provided  in  article  21. 

In  any  case  under  this  article  a  taxpayer  claiming  the  benefit  of 
this  provision  shall  at  the  time  of  making  the  return  file  a  claim  for 
abatement  (Form  47)  of  the  amount  by  which  the  tax  so  assessed 
exceeds  a  tax  computed  upon  the  basis  of  the  deduction  deter- 
mined as  provided  in  this  article.  In  cases  coming  within  the  pro- 
visions of  this  article  payment  of  that  portion  of  the  tax  covered 


12  WAR  EXCESS  PROFITS  TAX 

by  the  claim  for  abatement  will  not  be  required  until  the  claim  is 
decided.  If,  however,  in  the  judgment  of  the  Commissioner  of 
Internal  Revenue  the  interests  of  the  United  States  would  be  jeop- 
ardized thereby,  the  right  is  reserved  to  require  the  claimant  to 
give  a  bond  of  such  amount  and  with  such  sureties  as  the  commis- 
sioner thinks  wise  to  safeguard  such  interests.  The  bond  shall  be 
conditioned  for  the  payment  of  any  tax  found  to  be  due  with  in- 
terest thereon,  and  if  a  bond  satisfactory  to  the  commissioner  is 
not  given  within  such  time  as  he  prescribes,  the  full  amount  of  the 
tax  assessed  will  become  immediately  due  and  the  amount  over- 
paid, if  any,  will  upon  final  decision  of  the  application,  be  refunded 
as  a  tax  erroneously  or  illegally  collected. 

Art.  24.  When  invested  capital  can  not  be  satisfactorily  deter- 
mined.— If  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to 
determine  the  invested  capital,  the  deduction  shall  be  the  sum  of — 

(1)  An  amount  equal  to  the  same  proportion  of  the  net  income  of 
the  trade  or  business  for  the  taxable  year  as  the  average  deduction 
(determined  in  the  same  manner  as  provided  in  article  21  without 
including  the  $3,000  or  $6,000  therein  referred  to)  for  the  corre- 
sponding calendar  year,  of  representative  corporations,  partner- 
ships, and  individuals  engaged  in  a  like  or  similar  trade  or  business, 
is  of  their  average  net  income,  plus 

(2)  In  the  case  of  a  domestic  corporation  $3,000,  and  in  the  case 
of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United 
States,  $6,000. 

The  Commissioner  of  Internal  Revenue  in  determining  for  any 
calendar  year  the  proportion  which  the  average  deduction  of  repre- 
sentative corporations,  partnerships,  and  individuals  engaged  in  any 
particular  trade  or  business  is  of  their  average  net  income,  will  in- 
clude the  deductions  and  net  income  of  representative  corporations 
and  partnerships  for  fiscal  years  ending  during  such  calendar  year. 

For  the  purpose  of  applying  this  article  in  the  case  of  a  corpora- 
tion or  partnership  which  has  fixed  its  own  fiscal  year,  the  propor- 
tion determined  for  the  calendar  year  ending  during  such  fiscal 
year  shall  be  used. 

In  every  case  of  a  trade  or  business  having  invested  capital  a  re- 
turn shall  be  made  in  the  first  instance  in  accordance  with  article 
21   or  23,  but  the  taxpayer  may  submit  therewith  a  statement  of 


WAR  EXCESS  PROFITS  TAX  13 

reasons  why  in  his  opinion  the  tax  should  be  assessed  in  accordance 
with  this  article. 

NET  INCOME— GENERAL  PROVISIONS. 

Art.  25.  Exemptions. — The  following  classes  of  income  are  ex- 
empt from  the  tax : 

(a)  Income  exempt  from  taxation  under  section  4  of  the  act  of 
September  8,  1916,  as  amended.  (See  Income  Tax  Regulations, 
art.  5.) 

(b)  Income  derived  from  the  business  of  life,  health,  and  accident 
insurance  combined  in  one  policy  issued  on  a  weekly  premium  pay- 
ment plan. 

(c)  Compensation  or  fees  received  by  officers  and  employees 
under  the  United  States  or  any  State,  Territory,  or  the  District  of 
Columbia  for  their  services  as  such. 

Art.  26.  Net  income  of  foreign  corporations,  partnerships,  and 
nonresident  alien  individuals. — In  the  case  of  a  foreign  corporation 
or  partnership  or  a  nonresident  alien  individual  the  net  income  shall 
be  the  net  income  from  sources  within  the  United  States. 

Art.  27.  Dividends  received  from  a  foreign  corporation  which  is 
subject  to  Federal  income  tax. — In  the  case  of  income  derived  by  a 
corporation  or  partnership  from  dividends  upon  the  stock  of  a 
foreign  corporation,  part  of  whose  net  income  is  subject  to  the  in- 
come tax,  there  shall  be  deducted  only  that  proportion  of  the  divi- 
dends received  upon  such  stock  which  the  net  income  of  such  foreign 
corporation  from  sources  within  the  United  States  is  of  its  entire 
net  income. 

Where  dividends  upon  the  stock  of  a  foreign  corporation  are 
received  by  an  individual,  as  a  part  of  his  income  from  trade  or 
business,  there  shall  be  included  in  the  net  income  that  proportion 
of  the  dividends  received  upon  such  stock  which  the  net  income  of 
such  corporation  from  sources  outside  the  United  States  is  of  its 
entire  net  income. 

NET  INCOME— CORPORATIONS. 

Art.  28.  Taxable  year. — The  net  income  of  a  corporation  for  the 
taxable  year  shall  be  determined  by  adding  (1)  the  amount  of  net 
income  ascertained  and  returned  for  income  tax  purposes  for  such 
taxable  year  as  provided  in  Title  I  of  the  act  of  September  8,  1916, 
as  amended,  and  (2)  the  amount,  if  any,  received  as  interest  on 
bonds  or  other  obligations  of  the  United  States,  issued  after  Sep- 


14  WAR  EXCESS  PROFITS  TAX 

tember  24,  1917  (other  than  the  interest  received  on  an  amount  of 
such  bonds  or  obligations  the  aggregate  principal  of  which  does  not 
exceed  $5,000),  and  deducting  from  the  total  so  obtained  the 
amounts  received  during  the  taxable  year  as  dividends  upon  the 
stock  or  from  the  net  earnings  of  other  corporations,  joint-stock 
companies  or  associations,  or  insurance  companies,  subject  to  the 
income  tax  imposed  by  Title  I  of  such  act  of  September  8,  1916,  as 
amended,  except  as  otherwise  provided  in  article  27. 

Art.  29.  Prewar  period. — The  net  income  of  a  corporation  for  the 
prewar  period  shall  be  computed  as  follows : 

(a)  For  the  calendar  year  1911  by  adding  (1)  the  amount  of  net 
income  shown  in  item  9  of  the  return  made  under  section  38  of  the 
act  of  August  5,  1909,  for  the  calendar  year  1911,  and  (2)  the  amount 
of  taxes  paid  to  the  United  States  within  the  calendar  year  1911 
under  section  38  of  such  act ; 

(b)  For  the  calendar  year  1912  by  adding  (1)  the  amount  of  net 
income  shown  in  item  9  of  the  return  made  under  section  38  of  the 
act  of  August  5,  1909,  for  the  calendar  year  1912,  and  (2)  the 
amount  of  taxes  paid  to  the  United  States  within  the  calendar  year 
1912  under  section  38  of  such  act;  and 

(c)  For  the  calendar  year  1913  by  adding  (1)  the  amount  of  the 
entire  net  income  shown  in  item  8  of  the  return  made  under  Section 
II  of  the  act  of  October  3,  1913.  for  the  calendar  year  1913,  and 
(2)  the  amount  of  taxes  paid  zvithin  the  calendar  year  1913  under 
section  38  of  the  act  of  August  5,  1909.  and  Section  II  or  IV  of  the 
act  of  October  3,  1913,  and  deducting  from  the  total  so  obtained 
the  amounts  received  during  the  calendar  year  1913  as  dividends 
upon  the  stock  or  from  the  net  earnings  of  other  corporations,  joint- 
stock  companies  or  associations,  or  insurance  companies,  subject  to 
the  income  tax  imposed  by  Section  II  of  the  act  of  October  3,  1913. 

NET   INCOME— PARTNERSHIPS. 

Art.  30.  Taxable  year. — The  net  income  of  a  partnership  for  the 
taxable  year  shall  be  determined  by  adding  the  amount  of  its  entire 
net  income  (or  in  the  case  of  a  foreign  partnership,  its  entire  net 
income  from  sources  within  the  United  States)  ascertained  upon 
the  same  basis  and  in  the  same  manner  as  provided  with  respect  to 
individuals  for  income-tax  purposes  by  Title  I  of  the  act  of  Septem- 
ber 8,  1916,  as  amended  (see  Income  Tax  Regulations,  art.  30),  in- 
cluding the  amounts,  if  any,  received  during  the  year  as  interest  on 


WAR  EXCESS  PROFITS  TAX  15 

bonds  or  other  obligations  of  the  United  States  issued  after  Septem- 
ber 24,  1917  (other  than  the  interest  on  an  amount  of  such  bonds  or 
obligations,  the  aggregate  principal  of  which  does  not  exceed 
$5,000),  and  deducting  therefrom — 

(1)  The  amounts  received  during  the  taxable  year  as  dividends 
upon  the  stock  or  from  the  net  earnings  of  corporations,  joint- 
stock  companies  or  associations,  or  insurance  companies,  subject  to 
the  income  tax  imposed  by  Title  I  of  the  act  of  September  8,  1916, 
as  amended,  except  as  otherwise  provided  in  article  27;  and 

(2)  The  deductions,  if  any,  for  salaries  or  interest  allowed  by 
articles  32  and  33,  if  such  deductions  have  not  already  been  made. 

Art.  31.  Prewar  period. — The  net  income  of  a  partnership  for  each 
of  the  calendar  years  1911,  1912,  and  1913  shall  be  determined  in  the 
same  manner  as  the  net  income  for  the  taxable  year,  except  that 
dividends  upon  the  stock  or  from  the  net  earnings  of  corporations, 
joint-stock  companies  or  associations,  or  insurance  companies,  sub- 
ject to  the  tax  imposed  by  section  38  of  the  act  of  August  5,  1909, 
or  by  Section  II  of  the  act  of  October  3,  1913,  shall  be  deducted. 
(See  art.  30.) 

Art.  32.    Deductions  allowed  for  salaries  paid  to  partners. — In 

computing  net  income  for  purposes  of  the  excess  profits  tax  a 
partnership  will  be  allowed  to  deduct  as  an  expense  reasonable 
salaries  or  compensation  paid  to  individual  partners  for  personal 
services  actually  rendered  during  the  taxable  year,  if  the  payments 
are  made  in  accordance  with  prior  agreements  and  are  properly 
recorded  on  the  books  of  the  partnership.  In  no  case  shall  the 
salaries  or  compensation  so  deducted  be  in  excess  of  the  salaries  or 
compensation  customarily  paid  for  similar  services  under  like  re- 
sponsibilities by  corporations  engaged  in  like  or  similar  trades  or 
businesses. 

With  respect  to  any  period  prior  to  March  1,  1918,  regardless  of 
whether  a  previous  agreement  has  been  made  as  to  salaries  or  com- 
pensation, a  similar  deduction  will  be  allowed  for  services  actually 
rendered. 

In  the  case  of  a  foreign  partnership  the  deduction  shall  be  limited 
to  those  portions  of  salaries  or  compensation  which  are  paid  for 
services  rendered  with  respect  to  trade  or  business  carried  on  in  the 
United  States. 


16  WAR  EXCESS  PROFITS  TAX 

A  partner  in  his  individual  capacity  is,  however,  subject  to  the 
excess  profits  tax,  if  any,  at  the  8  per  cent  rate  under  article  15 
with  respect  to  any  salary  or  compensation  from  the  partnership  for 
personal  services  (including  any  amounts  allowed  to  the  partnership 
as  a  deduction  on  his  account  for  the  period  prior  to  March  1,  1918). 

Art.  33.  Deductions  allowed  for  interest  on  bona  fide  loans  by 
partners. — In  computing  net  income  for  purposes  of  the  excess 
profits  tax  a  partnership  will  be  allowed  to  deduct  amounts  paid 
during  the  year  to  an  individual  partner  as  interest  upon  any  bona 
fide  loan,  but  no  deduction  for  so-called  interest  upon  capital  will  be 
allowed. 

Art.  34.  If  deduction  is  made  under  article  32  or  33,  correspond- 
ing deduction  must  also  be  made  for  prewar  period. — If,  in  com- 
puting net  income  for  purposes  of  the  excess  profits  tax,  a  partnership 
makes  a  deduction  as  allowed  by  article  32  for  salaries  paid  to  part- 
ners during  the  taxable  year,  it  must  also  in  computing  net  income 
for  the  prewar  period  make  a  corresponding  deduction  ;  and  if  it 
makes  such  a  deduction  as  allowed  by  article  33  for  interest  paid  to 
partners,  it  must  also  in  computing  net  income  for  the  prewar  period 
make  a  corresponding  deduction  for  any  such  interest  actually  paid 
during  that  period. 

NET   INCOME— INDIVIDUALS. 

Art.  35.  Determination  of  net  income  where  there  is  no  invested 
capital  or  only  nominal  capital. — The  net  income  which  is  derived 
from  a  trade  or  business  having  no  invested  capital  or  not  more  than 
a  nominal  capital,  including  salaries,  wages,  fees  or  other  compensa- 
tions (constituting  net  income  of  class  A  as  denned  in  art.  14)  shall 
be  determined  for  the  taxable  year  by  adding  the  total  net  income 
from  all  such  sources  (or  in  the  case  of  a  nonresident  alien  in- 
dividual the  total  net  income  from  all  such  sources  within  the 
United  States)  as  reported  for  income  tax  purposes  for  the  same 
year. 

Art.  36.  Determination  of  net  income  for  taxable  year  when  there 
is  invested  capital. — The  net  income  which  is  derived  from  a  trade 
or  business  having  invested  capital  (constituting  net  income  of  class 
B,  as  defined  in  art.  14)  shall  be  determined  for  the  taxable  year  by 
adding  the  total  net  income  from  such  sources  (or  in  the  case  of  a 
nonresident  alien  individual  the  total  net  income  from  such  sources 
within  the  United  States)  as  reported  for  income  tax  purposes  for 
the  same  year  and  deducting  therefrom  the  deduction,  if  any,  for 


WAR  EXCESS  PROFITS  TAX  17 

salary  allowed  by  article  39,  if  such  deduction  has  not  already  been 
made. 

There  shall  be  excluded  the  amounts  received  during  the  year 
upon  the  stock  or  from  the  net  earnings  of  corporations,  joint-stock 
companies  or  associations,  or  insurance  companies,  subject  to  the 
income  tax  imposed  by  Title  I  of  the  act  of  September  8,  1916,  as 
amended. 

In  the  case,  however,  of  an  individual  dealing  in  securities  or 
otherwise  using  securities  in  trade  or  business  there  shall  be  in- 
cluded (1)  the  amount,  if  any,  received  as  interest  on  bonds  or 
obligations  of  the  United  States,  issued  after  September  24,  1917 
(other  than  the  interest  received  on  an  amount  of  such  bonds  or 
obligations  the  aggregate  principal  of  which  does  not  exceed  $5,000), 
and  (2)  such  proportion  of  dividends  received  upon  the  stock  of 
foreign  corporations  as  is  required  to  be  included  by  article  27. 

Illustration. — An  individual  owns  a  farm  representing  an  invested  capi- 
tal of  $25,000,  a  country  store  with  an  invested  capital  of  $6,000,  and  a  flour 
mill  with  an  invested  capital  of  $10,000.  His  net  income  from  the  farm  is 
$4,000,  from  the  store  $3,000,  and  from  the  mill  $3,000.  Thus  his  total  net 
income  of  class  B  is  $10,000.  His  total  invested  capital  is  $41,000.  Assuming 
that  his  deduction  is  at  the  rate  of  8  per  cent,  his  total  deduction  will  be 
$3,280  plus  $6,000,  or  $9,280,  to  be  applied  against  his  net  income  of  $10,000 
in  computing  the  tax  at  the  graduated  rates  under  articles  16  and  17. 

The  same  individual  allows  himself  a  salary  of  $1,000  for  working  the  farm 
and  $900  for  running  the  store,  draws  a  salary  of  $1,200  as  president  of  the 
local  bank,  and  receives  $250  in  compensation  for  personal  services  of 
various  kinds,  such  as  road  work,  helping  neighbors  in  harvest,  etc.  He 
also  receives  $300  in  dividends  on  an  investment  in  certain  stocks  and  $100 
as  supervisor's  fees.  The  last  item — that  is,  supervisor's  fees —  is  exempt 
under  the  law  (sec.  201,  subdivision  a).  The  $300  in  dividends  is  not  tax- 
able, inasmuch  as  it  is  derived  from  a  mere  investment  not  connected  with 
his  trade  or  business.  His  net  income  of  class  A  will  therefore  consist  of 
his  salaries  and  his  compensation  for  personal  services,  a  total  of  $3,350. 
Since  he  is  entitled  to  a  deduction  of  $6,000  as  to  this  class  of  income,  he 
will  have  no  tax  to  pay  at  the  8  per  cent  rate  under  article  15. 

Art.  37.  Deduction  of  contributions  for  religious,  charitable,  etc., 
purposes. — Contributions  or  gifts  for  religious,  charitable,  etc.,  pur- 
poses allowed  as  a  deduction  for  purposes  of  the  income  tax  under 
paragraph'  "Ninth"  of  subdivision  (a)  of  section  5  of  the  act  of 
September  8,  1916,  as  amended,  may,  subject  to  the  limitations 
therein  contained,  be  deducted  in  computing  the  net  income  of  the 
trade  or  business  for  purposes  of  the  excess  profits  tax  only  when  it 
is  shown  to  the  satisfaction  of  the  Commissioner  of  Internal  Rev- 


18  WAR  EXCESS  PROFITS  TAX 

enue  that  such  contributions  or  gifts  are  made  by  the  trade  or  busi- 
ness and  not  by  the  individual  in  his  personal  capacity. 

Art.  38.  Determination  of  net  income  for  the  prewar  period  where 
there  is  invested  capital. — The  net  income  which  is  derived  from  a 
trade  or  business  having  invested  capital  (constituting  net  income 
of  class  B  as  defined  in  article  14)  shall  be  determined  for  each  of 
the  calendar  years  1911,  1912,  and  1913  upon  the  same  basis  and  in 
the  same  manner  as  provided  in  article  36. 

Art.  39.  Deduction  allowed  for  salary  to  himself. — An  individual 
carrying  on  a  trade  or  business  having  an  invested  capital  may  in 
computing  the  net  income  of  the  trade  or  business  for  purposes  of 
the  excess  profits  tax  deduct  a  reasonable  amount  designated  by 
him  as  salary  or  compensation  for  personal  service  actually  rendered 
by  him  in  the  conduct  of  such  trade  or  business.  In  no  case  shall 
the  amount  so  designated  be  in  excess  of  the  salaries  or  compensa- 
tion customarily  paid  for  similar  service  under  like  responsibilities 
by  corporations  or  partnerships  engaged  in  like  or  similar  trades  or 
businesses. 

In  the  case  of  a  nonresident  alien  individual,  the  amount  deducted 
shall  be  limited  to  that  portion  of  the  salary  or  compensation  which 
is  for  service  rendered  with  respect  to  trade  or  business  carried  on 
in  the  United  States. 

The  amount  so  designated  shall,  however,  be  included  in  com- 
puting his  net  income  of  class  A  under  article  35 ;  and  the  balance  of 
the  income  from  his  trade  or  business  shall  be  included  in  comput- 
ing his  net  income  of  class  R  under  article  36. 

Illustration. — An  individual  owns  and  runs  a  newspaper  having  an 
invested  capital  of  $50,000.  The  net  income  from  the  newspaper,  without 
making  any  allowance  for  the  salary  of  the  owner,  is  $20,000,  and,  as  income 
of  class  B,  is  subject  to  the  graduated  rates  prescribed  in  article  16.  His 
deduction,  as  provided  for  in  subdivision  (b)  of  article  21,  would  be  $4,500 
(9  per  cent  of  his  capital)  plus  $6,000,  a  total  of  10,500.  If,  however,  he 
allows  himself  a  salary  of  $3,000,  the  net  income  from  the  newspaper  will  be 
$17,000,  and  the  deduction  of  $10,500  will  be  applied  against  the  amount. 

His  salary  of  $3,000  must  be  included  in  his  return  as  income  of  class  A, 
which  is  subject  to  the  8  per  cent  rate  under  article  15.  If  it  constitutes  his 
only  income  of  that  class  he  will  pay  no  tax  thereon,  inasmuch  as  it  is  less 
than  the  deduction  of  $6,000  to  which  he  is  entitled  as  to  that  class  of  in- 
come. But  if,  for  example,  he  receives  in  addition  a  salary  of  $4,000  as  presi- 
ident  of  the  local  bank,  his  total  net  income  of  class  A  will  be  $7,000,  and  he 
will  be  required  to  pay  a  tax  of  8  per  cent  on  $1,000  thereof,  or  $80. 

Art.  40.  If  deduction  is  made  under  article  39  corresponding  de- 
duction must  also  be  made  for  prewar  period. — If,  in  computing  net 


WAR  EXCESS  PROFITS  TAX  19 

income  for  purposes  of  the  excess  profits  tax,  an  individual  deducts 
a  reasonable  amount  designated  as  salary  or  compensation  for  per- 
sonal services  rendered  by  himself,  as  allowed  by  article  39,  he  must 
also  in  computing  net  income  for  the  prewar  period,  make  a  corre- 
sponding deduction. 

Art.  41.  Individual  member  of  partnership.1 — Inasmuch  as  a  part- 
ner in  his  individual  capacity  is  not  considered  to  be  engaged  in 
trade  or  business  with  respect  to  his  share  in  the  profits  of  the 
partnership,  he  is  not  subject  to  excess  profits  tax  thereon.  Con- 
sequently, in  computing  his  net  income  for  purposes  of  the  excess 
profits  tax  he  need  not  include  his  share  of  the  partnership  profits. 

He  shall,  however,  in  computing  his  net  income  of  class  A  under 
article  35,  include  any  salary  or  compensation  from  the  partnership 
for  personal  services  (including  any  amount  allowed  to  the  partner- 
ship as  a  deduction  on  his  account  for  the  period  prior  to  March  1, 
1918,  in  accordance  with  article  32). 

INVESTED  CAPITAL— GENERAL  PROVISIONS. 

Art.  42.  Allowance  for  depletion,  depreciation,  and  obsolescence 
in  computation  of  invested  capital. — The  term  "invested  capital"  as 
used  in  the  excess  profits  tax  law  means  the  invested  capital  of  the 
present  owner.  The  basis,  or  starting  point,  in  the  computation  of 
invested  capital  is  found  in  the  amount  of  cash  and  other  property 
paid  in,  the  original  values  of  such  other  property  being  determined 
in  accordance  with  the  rules  laid  down  in  these  regulations.  But 
the  computation  does  not  stop  with  such  original  entries  or 
amounts ;  it  must  take  properly  into  account  the  surplus  and  un- 
divided profits.  In  the  computation  of  surplus  and  undivided  profits, 
however,  full  recognition  must  first  be  given  to  expenses  incurred 
and  losses  sustained  from  the  original  organization  of  the  business 
concern  down  to  the  taxable  year,  including  among  such  expenses 
and  losses  a  reasonable  allowance  for  depletion,  depreciation,  or 
obsolescence  of  property  originally  acquired  for  cash  or  for  stock  or 
shares  or  in  any  other  manner.  If  value  appreciation  of  a  kind  not 
subject  to  income  tax  (other  than  that  allowed  under  article  55)  has 
been  taken  up  in  the  accounts,  a  deduction  must  be  made  in  respect 
of  such  appreciation  so  taken  up.  In  the  computation  of  the  in- 
vested capital  for  any  year  full  effect  must  also  be  given  to  any 
liquidation  of  the  original  capital. 


20  WAR  EXCESS  PROFITS  TAX 

Art.  43.  How  to  ascertain  average  invested  capital  for  the  year, 
averaged  monthly. — The  invested  capital  for  any  prewar  or  taxable 
year  (or  where  the  tax  is  computed  upon  the  basis  of  a  period  less 
than  a  year,  for  such  period)  is  the  average  invested  capital  for  the 
year  or  period  averaged  monthly,  according  to  the  following  rules: 

(a)  Add  the  capital  for  each  of  the  several  months  during  which 
no  change  occurs,  and  the  average  capital  (ascertained  as  provided 
in  subdivision  (b)  of  this  article)  for  each  month  in  which  a  change 
occurs  and  divide  the  total  by  the  number  of  months  in  the  year  or 
period. 

(b)  To  ascertain  the  capital  for  any  month  in  which  a  change 
occurs  multiply  the  capital  as  of  the  first  day  of  the  month  by  the 
number  of  days  it  remains  constant  and  the  capital  after  each  change 
by  the  number  of  days  (including  the  day  on  which  the  change 
occurs)  during  which  it  remains  constant,  add  the  products,  and 
divide  the  sum  by  the  number  of  days  in  the  month. 

Art.  44.  Items  not  allowed  to  be  included  in  invested  capital. — 
The  second  paragraph  of  section  207  of  the  excess  profits  law 
specifies  certain  items  which  may  not  be  included  in  invested 
capital,  namely : 

(a)  Stocks,  bonds  (other  than  obligations  of  the  United  States), 
or  other  assets,  the  income  from  which  is  not  subject  to  the  excess 
profits  tax ;  and 

(b)  Money  or  other  property  borrowed. 

The  term  "money  or  other  property  borrowed"  as  used  in  section 
207  and  these  regulations  includes  not  only  cash  or  other  borrowed 
property  which  can  be  identified  as  such,  but  current  liabilities  and 
temporary  indebtedness  of  all  kinds,  and  any  permanent  indebted- 
ness upon  which  the  taxpayer  is  entitled  to  an  interest  deduction  in 
computing  net  income.  A  corporation  which  under  the  income-tax 
law  is  allowed  to  deduct  only  a  part  of  the  entire  interest  paid  upon 
its  indebtedness,  may  include  in  its  invested  capital  such  a  propor- 
tion of  its  permanent  indebtedness  as  the  amount  of  interest  upon 
such  indebtedness  which  the  corporation  is  not  allowed  to  deduct 
is  of  the  total  amount  of  interest  paid  upon  such  indebtedness  dur- 
ing the  taxable  year. 

Art.  45.  When  income  from  tax-free  securities  consists  partly  of 
trading  profits  and  partly  of  interest,  dividends,  etc. — Whenever 
income  consists  partly  of  gains  or   profits  subject  to  the  excess 


WAR  EXCESS  PROFITS  TAX  21 

profits  tax  arising  from  trading  in  stocks,  bonds,  etc.,  the  dividends 
or  interest  on  which  are  not  subject  to  such  tax,  and  partly  of  such 
dividends  or  interest,  then,  subject  to  the  limitations  as  to  bor- 
rowed money,  there  shall  be  included  in  the  invested  capital  an 
amount  which  bears  the  same  ratio  to  the  total  amount  invested  in 
such  stocks  or  bonds  as  the  amount  of  such  gains  or  profits  bears  to 
the  total  amount  of  such  income. 

Art.  46.  Treatment  of  stock  of  foreign  corporations  when  held  by 
domestic  corporations  or  partnerships  or  by  citizens  or  residents  of 
the  United  States. — In  the  case  of  domestic  corporations  or  partner- 
ships and  of  citizens  or  residents  of  the  United  States  holding  stock 
in  a  foreign  corporation  part  of  whose  net  income  is  subject  to  the 
income  tax,  there  shall  be  included  in  invested  capital  such  propor- 
tion of  the  value  of  the  stock  in  such  foreign  corporation  as  the  net 
income  of  such  foreign  corporation  from  sources  outside  the  United 
States  is  of  its  entire  net  income. 

Art.  47.  Construction  of  terms  "tangible  property"  and  "intangible 
property." — The  term  "other  intangible  property"  as  used  in  section 
207  will  be  construed  to  mean  property  of  a  character  similar  to 
good  will,  trade-marks,  and  the  other  specific  kinds  of  property 
enumerated  in  the  same  clause.  With  respect  to  property  not  clearly 
of  such  a  character,  rulings  will  be  issued  as  occasion  may  demand 
to  indicate  whether  it  shall  be  regarded  as  tangible  or  intangible. 

The  following  classes  of  property,  when  paid  in  for  stock  or  shares 
in  a  corporation  or  partnership,  will  be  regarded  as  tangible  prop- 
ety  so  paid  in  : 

(a)  Stocks. 

(b)  Bonds. 

(c)  Bills  and  accounts  receivable. 

(d)  Notes  and  other  evidences  of  indebtedness. 

(e)  Leaseholds. 

But  when  a  corporation  pays  for  intangible  property  by  the 
issuance  of  its  own  stock  or  bonds,  this  will  not  be  regarded  as 
being  a  payment  bona  fide  made  in  cash  or  tangible  property  within 
the  meaning  of  section  207. 

Art.  48.  Invested  capital  of  foreign  corporations  or  partnerships 
or  nonresident  alien  individuals. — When  used  with  reference  to  a 
foreign  corporation  or  partnership  or  a  nonresident  alien  individual, 
the  term  "invested  capital"  means  that  proportion  of  the  entire 


22  WAR  EXCESS  PROFITS  TAX 

invested  capital  as  defined  and  limited  by  these  regulations  which 
the  net  income  from  sources  within  the  United  States  is  of  the 
entire  net  income. 

Art.  49.  Reorganization  on  or  after  January  2,  1913. — A  trade  or 
business  carried  on  by  a  corporation,  partnership,  or  individual, 
which  has  been  formally  organized  or  reorganized  on  or  after  Janu- 
ary 2,  1913,  but  which  is  substantially  a  continuation  of  a  trade  or 
business  carried  on  prior  to  that  date,  shall,  for  the  purposes  of  the 
excess  profits  tax,  be  deemed  to  have  been  in  existence  prior  to 
that  date  and  the  invested  capital  of  its  predecessor  prior  to  that 
date  shall  be  deemed  to  have  been  its  invested  capital.  This  article 
relates  to  the  prewar  period  and  does  not  apply  to  the  invested 
capital  for  the  taxable  year. 

Art.  50.  Reorganization  after  March  3,  1917. — In  case  of  the 
reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business  after  March  3,  1917,  if  an  interest  or  control  in  such  trade 
or  business  of  50  per  cent  or  more  remains  in  control  of  the  same 
persons,  corporations,  associations,  partnerships,  or  any  of  them, 
then  in  ascertaining  the  invested  capital  of  the  trade  or  business  no 
asset  transferred  or  received  from  the  prior  trade  or  business  shall 
be  allowed  a  greater  value  than  would  have  been  allowed  under 
these  regulations  in  computing  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  re- 
ceived, unless  such  asset  was  paid  for  specifically  as  such,  in  cash  or 
tangible  property,  and  then  not  to  exceed  the  actual  cash  or  actual 
cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such 
payment. 

Art.  51.  Invested  capital  for  prewar  period. — The  invested  capital 
for  the  prewar  period  shall,  in  general,  be  determined  in  the  same 
manner  as  for  the  taxable  year,  except  that  the  valuation  as  of 
January  1.  1914.  shall  not  apply  to  tangible  property  paid  in  for 
stock  or  shares. 

Art.  52.  Scope  of  section  210. — Section  210  provides  for  excep- 
tional cases  in  which  the  invested  capital  can  not  be  satisfactorily 
determined.  In  such  cases  the  taxpayer  may  submit  to  the  Com- 
missioner of  Internal  Revenue  evidence  in  support  of  a  claim  for 
assessment  under  the  provisions  of  section  210.  (See  articles  18 
and  24.)  Such  exceptional  cases  may  consist,  among  others,  of  the 
following: 


WAR  EXCESS  PROFITS  TAX  23 

(1)  Where,  through  defective  accounting  or  the  lack  of  adequate 
data,  it  is  impossible  accurately  to  compute  invested  capital. 

(2)  Where  upon  application  by  a  foreign  taxpayer  the  Secretary 
of  the  Treasury  finds  that  the  expense  of  securing  the  data  neces- 
sary for  the  computation  of  the  invested  capital  would  be  unreason- 
able in  view  of  the  amount  of  tax  involved,  or  that  it  is  impracticable 
to  determine  either  the  "entire  invested  capital"  or  the  "entire  net 
income." 

(3)  Long-established  business  concerns  which  by  reason  of  ultra- 
conservative  accounting  or  the  form  and  manner  of  their  organiza- 
tion would,  through  the  operation  of  section  207,  be  placed  at  a 
serious  disadvantage  in  competing  with  representative  concerns  in  a 
like  or  similar  trade  or  business. 

(4)  Where  the  invested  capital  is  seriously  disproportionate  to 
the  taxable  income.    Such  cases  may  arise  through  : 

(a)  The  realization  in  one  year  of  the  earnings  of  capital  unpro- 
ductively  invested  through  a  period  of  years  or  of  the  fruits  of 
activities  antedating  the  taxable  year;  or, 

(b)  Inability  to  recognize  or  properly  allow  for  amortization, 
obsolescence,  or  exceptional  depreciation  due  to  the  present  war, 
or  to  the  necessity  in  connection  with  the  present  war  of  providing 
plant  which  will  not  be  wanted  for  the  purposes  of  the  trade  or 
business  after  the  termination  of  the  war. 

INVESTED  CAPITAL— CORPORATIONS  AND  PARTNERSHIPS. 

Art.  53.  Rule  for  computing  invested  capital. — In  computing  in- 
vested capital,  every  corporation  or  partnership  paying  taxes  at  the 
graduated  rates  prescribed  in  section  201  .'(see  art.  16),  shall  add 
together  its  paid  in  capital  and  its  paid  in  or  earned  surplus  and  un- 
divided profits  (under  whatever  name  the  same  may  be  called)  as 
shown  by  its  books  at  the  beginning  of  the  taxable  year.  The  total 
thus  obtained  shall  be  adjusted  for  any  asset  or  item  which  it  covers 
that  is  not  carried  on  the  books  at  the  valuation  prescribed  by  law 
or  by  these  regulations.  When  necessary,  adjustment  (addition  or 
subtraction)  shall  be  made  in  respect  of  the  following: 

ADJUSTMENTS. 

1.  Stock  or  shares  issued  in  the  purchase  of  intangible  property 
prior  to  March  3,  1917,  which  can  not  be  included  in  an  amount  ex- 
ceeding (a)  20  per  cent  of  the  par  value  of  the  total  stock  or  shares 
outstanding  on  that  date,   (b)   the  actual  value  of  such  intangible 


24  WAR  EXCESS  PROFITS  TAX 

property  at  the  date  acquired,  or  (c)  the  par  value  of  the  stock  or 
shares  issued  in  payment  therefor,  whichever  is  the  lowest.  (See 
arts.  57  and  58.) 

2.  Stock  or  shares  issued  for  a  mixed  aggregate  of  tangible  prop- 
erty, patents  and  copyrights  and  good  will  or  other  intangible 
property.  (See  art.  59.) 

3.  Stock  or  shares  issued  for  patents  and  copyrights,  valued  at  (a) 
their  actual  cash  value  at  the  time  of  payment,  or  (b)  the  par  value 
of  the  stock  or  shares  issued  therefor,,  whichever  is  lower.  (See 
art.  56.) 

4.  Stock  or  shares  issued  for  tangible  property  prior  to  January  1, 
1914,  valued  at  (a)  the  actual  cash  value  of  such  property  on  Jan- 
uary 1,  1914,  or  (b)  the  par  value  of  the  stock,  whichever  is  lower. 
(See  art.  55.) 

5.  Stock  originally  issued  for  property  and  subsequently  returned 
to  the  corporation  as  a  gift,  etc.    (See  art.  54.) 

6.  Add  any  proportion  of  its  permanent  indebtedness  which  may 
be  included  under  article  44. 

7 .  Add  value  of  tangible  property  paid  in  for  stock  or  shares  in 
excess  of  the  par  value  of  such  shares,  when  authorized  by  article  63. 

8.  Add  amounts  expended  in  the  past  for  (a)  the  acquisition  of 
tangible  property  or  (b)  specifically  for  good  will  and  other  similar 
intangible  property,  when  authorized  by  article  64. 

9.  For  the  valuation  of  assets  acquired  in  reorganizations,  etc., 
(a)  effected  after  March  3,  1917,  see  article  50;  (b)  as  to  the  prewar 
period,  see  articles  49  and  51. 

10.  Deduct  amounts  representing  appreciation  excluded  by  arti- 
cle 42. 

11.  Make  any  additional  deductions  required  by  reason  of  insuffi- 
cient allowances  in  the  accounts  of  the  taxpayer  for  depletion,  de- 
preciation, and  obsolescence.    (See  art.  42.) 

Whenever  any  corrections  are  made  in  respect  of  the  capital  stock 
and  surplus,  corresponding  corrections  must  be  made  in  the  re- 
spective asset  items  in  the  balance  sheet  of  the  taxpayer. 

After  making  any  adjustments  required  under  paragraphs  1  to  11 
above,  the  adjusted  total  of  the  capital  and  surplus  account  will 
represent  the  invested  capital  at  the  beginning  of  the  taxable  year, 
except  that  in  any  case  where  the  admissible  assets  (and  these 
include  all  assets  when  valued  in  accordance  with  these  regulations, 
except  stocks,  bonds — other  than  obligations  of  the  United  States — 
the  income  of  which  is  not  subject  to  excess  profits  tax)  are  less 


WAR  EXCESS  PROFITS  TAX  25 

than  the  amount  of  such  adjusted  total,  then  the  invested  capital 
must  be  further  reduced  to  an  amount  equal  to  the  sum  of  thead- 
missible  assets.  Tax-free  securities  and  stock  in  foreign  corporations 
may  be  included  as  admissible  assets  to  the  extent  authorized  in  arti- 
cles 45  and  46. 

If  there  has  been  any  change  made  during  the  taxable  year  in 
the  amount  of  the  invested  capital,  the  monthly  average  shall  be 
taken  (see  art.  43),  but  in  no  case  may  the  invested  capital  include 
any  surplus  or  undivided  profits  earned  during  the  taxable  year. 

With  respect  to  the  taxable  year  1917,  every  such  corporation 
and  partnership  will  be  required  to  submit  a  balance  sheet  as  at 
the  first  day  of  the  taxable  year  and  also  a  balance  sheet  as  at  the 
close  of  the  taxable  year.  Thereafter  every  such  :  corporation  and 
partnership  will  be  required  to  submit  a  balance  sheet  as  at  the 
close  of  each  taxable  year.  Balance  sheets  should  be  made  in  accord- 
ance with  the  books  of  the  taxpayer  and  changes  in  respect  of  any 
items  therein  made  pursuant  to  these  regulations  should  be  ex- 
plained in  a  separate  statement  attached  to  the  balance  sheet  to 
which  it  relates. 

Art.  54.  Stock  returned  to  corporation. — For  the  purpose  of  com- 
puting invested  capital,  in  cases  where  the  stock  of  a  corporation  is 
issued  or  exchanged  for  property  (tangible  or  intangible),  the  fol- 
lowing rule  will  apply : 

When  any  of  such  stock  is  returned  to  the  corporation  as  a  gift  or 
for  a  consideration  substantially  less  than  its  par  value,  the  stock  so 
returned  shall  not  be  treated  as  a  part  of  the  stock,  issued  or  ex- 
changed for  such  property.  The  proceeds  derived  in  cash  or  its 
equivalent  from  the  resale  of  the  stock  so  returned  shall,  however, 
be  included  in  the  invested  capital  if  retained  and  employed  in  the 
business. 

Art.  55.  Valuation  of  tangible  property  paid  in  for  stock  or 
shares. — Tangible  property  paid  in  for  stock  or  shares  prior  to  Janu- 
ary 1,  1914,  must  be  valued  at  either  (a)  the  actual  cash  value  of 
such  property  on  January  1,  1914,  or  (b)  the  par  value  of  the  stock 
or  shares  specifically  issued  therefor,  whichever  is  lower.  This  is 
one  of  the  few  cases  in  which  the  law  permits  allowance  to  be  made 
for  appreciation,  and  here  no  appreciation  can  be  recognized  unless 
the  original  stock  or  shares  were  specifically  issued  in  exchange  for 
such  tangible  property. 

Tangible  property  paid  in  for  stock  or  shares  on  or  after  January 
1,  1914  will  be  taken  at  the  actual  cash  value  of  such  property  at 


26  WAR  EXCESS  PROFITS  TAX 

the  time  of  payment,  irrespective  of  the  par  value  of  the  stock  or 
shares. 

Art.  56.  Patents  and  copyrights. — Patents  and  copyrights  paid  in 
for  stock  or  shares  must  be  valued  at  either  (a)  the  actual  cash  value 
at  the  time  of  payment  or  (b)  the  par  value  of  the  stock  or  shares 
issued  therefor,  whichever  is  lower. 

Art.  57.  Valuation  of  intangible  property. — If  good  will,  trade- 
marks, trade  brands,  franchises  of  a  corporation  or  partnership,  or 
other  intangible  property  has  been  purchased  with  stock  or  shares 
issued  prior  to  March  3,  1917,  the  amount  that  may  be  included  in 
invested  capital  must  not  exceed  (a)  20  per  cent  of  the  par  value  of 
the  total  stock  or  shares  outstanding  on  that  date,  nor  (b)  the  actual 
value  of  the  asset  at  the  date  acquired,  nor  (c)  the  par  value  of  the 
stock  issued  in  payment  for  the  asset. 

Art.  58.  Application  of  20  per  cent  limitation  upon  intangible 
property. — The  20  per  cent  limitation  upon  intangible  property 
purchased  prior  to  March  3,  1917,  for  or  with  stock  or  shares  of  the 
corporation  or  partnership,  applies  not  to  each  item  or  class  of  in- 
tangible property  separately,  but  to  the  aggregate  amount  of  all 
such  property  so  purchased.  Such  intangible  property  may  be  in- 
cluded in  the  invested  capital  only  up  to  an  amount  not  exceeding 
20  per  cent  of  the  total  stock  or  shares  of  the  corporation  or  partner- 
ship on  March  3,  1917,  even  though  the  aggregate  amount  of  such 
intangible  property  be  greater  in  value  than  such  20  per  cent  of  the 
par  value  of  the  total  stock  or  shares. 

Intangible  property  bona  fide  purchased  prior  to  March  3,  1917, 
with  stock  having  no  par  value  may  be  included  in  invested  capital 
at  a  value  not  exceeding  the  actual  cash  value  of  such  intangible 
property  at  the  time  of  the  purchase  and  in  an  amount  not  exceed- 
ing 20  per  cent  of  the  total  shares  of  stock  outstanding  on  March  3, 
1917,  measured  by  their  value  as  at  the  date  or  dates  of  issue. 

Art.  59.  Rules  to  govern  cases  where  shares  or  securities  are 
issued  for  mixed  aggregate  of  tangible  and  intangible  property. — 
Where  stock  or  shares  (or  stock  or  shares  and  bonds  or  other  ob- 
ligations) have,  prior  to  March  3,  1917,  been  issued  for  a  mixed 
aggregate  of — 

i  a  i   Tangible  property. 

(b)  Patents  and  copyrights,  and 

(c)  Good  will  or  other  intangible  property, 
the  following  rules  will  govern  : 


WAR  EXCESS  PROFITS  TAX  27 

(1)  In  the  absence  of  satisfactory  evidence  to  the  contrary,  it  will 
be  presumed  in  the  case  of  a  corporation,  that  its  stock  was  issued 
for  the  following  purposes  in  the  order  named: 

(a)  Good  will  or  other  intangible  property, 

(b)  Patents  and  copyrights,  and 

(c)  Tangible  property. 

(2)  Upon  the  production  by  the  taxpayer  of  evidence  satisfactory 
to  the  Commissioner  of  Internal  Revenue  as  to  the  actual  values  at 
the  date  of  acquisition  of  (a)  the  tangible  property  and  (b)  the 
patents  and  copyrights,  the  sum  of  these  two  items  may  be  applied 
against  the  total  par  value  of  the  securities  issued  and  the  remainder 
will  then  be  deemed  to  represent  the  par  value  of  the  securities 
issued  for  the  good  will  or  other  intangible  property. 

(3)  Cases  where  mixed  aggregates  of  tangible  and  intangible 
property  have  been  paid  in  for  stock  and  bonds  shall,  if  the  Secre- 
tary of  the  Treasury  is  unable  to  determine  satisfactorily  the  respec- 
tive values  of  the  several  classes  of  property  at  the  time  of  payment, 
be  treated  as  coming  under  articles  18  and  24  and  the  tax  shall  be 
assessed  accordingly. 

Art.  60.  Valuation  of  intangible  assets  purchased. — Good  will  and 
other  similar  intangible  assets  purchased  with  cash  or  tangible 
property  must  be  taken  at  a  value  not  in  excess  of  the  cash  or 
actual  cash  value  of  the  tangible  property  specifically  paid  therefor. 

Art.  61.  Surplus  or  undivided  profits  earned  during  any  year  ex- 
cluded in  computing  invested  capital  for  such  year. — Profits  earned 
during  any  taxable  year  or  prewar  year  shall  not  be  included  in  the 
computation  of  the  invested  capital  for  such  year,  even  though  set 
up  as  "surplus"  upon  the  books  or  distributed  in  the  form  of  stock 
dividends. 

Art.  62.  Scope  of  phrase  "surplus  and  undivided  profits." — Clause 
(3)  of  subdivision  (a)  of  section  207  authorizes  the  inclusion  in  in- 
vested capital  of  earned  surplus  and  undivided  profits  used  or  em- 
ployed in  the  business.  Inasmuch  as  section  201  provides  that  all 
the  income  of  a  corporation  or  partnership  shall  be  deemed  to  be 
received  from  its  trade  or  business,  all  the  surplus  and  undivided 
profits  of  a  corporation  or  partnership  (exclusive  of  undivided 
profits  earned  during  the  year),  from  whatever  source  derived,  will, 
unless  invested  in  stocks,  bonds  (other  than  obligations  of  the 
United  States),  or  other  assets,  the  income  from  which  is  not  sub- 
ject to  the  excess  profits  tax,  be  deemed  to  be  used  or  employed  in 
the  business  and  may  be  included  in  the  invested  capital. 


28  WAR  EXCESS  PROFITS  TAX 

Art.  63.  When  tangible  property  may  be  included  in  surplus. — 
Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commis- 
sioner of  Internal  Revenue  that  tangible  property  has  been  con- 
veyed to  a  corporation  or  partnership  by  gift  or  at  a  value,  ac- 
curately ascertainable  or  definitely  known  as  at  the  date  of  con- 
veyance, clearly  and  substantially  in  excess  of  the  cash  or  the  par 
value  of  the  stock  or  shares  paid  therefor,  then  the  amount  of  the 
excess  shall  be  deemed  to  be  paid  in  surplus.  The  adopted  value 
shall  not  cover  mineral  deposits  or  other  properties  discovered  or 
developed  after  the  date  of  conveyance,  but  shall  be  confined  to  the 
value  accurately  ascertainable  or  definitely  known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under 
these  circumstances  must  be  as  of  the  date  of  conveyance,  and  may 
consist,  among  other  things,  of  (1)  an  appraisal  of  the  property  by 
disinterested  authorities,  (2)  the  assessed  value  in  the  case  of  real 
estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the 
stock  or  shares. 

Art.  64.  Reconstruction  of  surplus  and  undivided  profits  accounts. 
— Where  through  failure  to  provide  for  depletion,  depreciation,  ob- 
solescence, or  other  expenses  or  losses,  or  where  for  any  other  cause 
or  reason  the  books  of  account  of  the  taxpayer  do  not  show  the 
true  paid-in  or  earned  surplus  and  undivided  profits,  in  the  compu- 
tation of  invested  capital  such  adjustments  shall  be  made  as  are 
necessary  to  arrive  at  a  statement  of  the  correct  amount. 

Where  a  taxpayer  claims  additions  to  the  capital  account,  the 
books  of  account  will  be  presumed  to  show  the  true  facts  and  the 
burden  of  proof  will  rest  upon  the  taxpayer.  Such  additions  will  be 
accepted  only  to  the  extent  and  under  the  conditions  stated  below : 

(1)  Amounts  which  have  been  expended  in  the  past  for  the  acqui- 
sition of  plant,  equipment,  tools,  patterns,  furniture,  fixtures,  or  like 
tangible  property  having  a  useful  life  extending  substantially  be- 
yond the  year  in  which  the  expenditure  was  made,  and  which  have 
been  charged  as  current  expense,  may  (less  proper  reduction  for 
depreciation  or  obsolescence)  be  added  to  the  surplus  account  in 
computing  invested  capital  when  such  assets  are  still  owned  and  in 
active  use  by  the  taxpayer  during  the  taxable  year.  Special  tools, 
patterns,  and  similar  assets  shall  not  be  assigned  any  value  if  their 
cost  has  been  recovered  through  having  been  included  in  the  price 
of  goods.  If  their  cost  has  not  been  so  recovered  and  they  are  held 
for  only  occasional  use,  they  shall  not  be,  assigned  a  value  in  ex- 


WAR  EXCESS  PROFITS  TAX  29 

cess  of  the  fair  value  based  upon  the  earnings  actually  arising  from 
their  current  use.  Assets  of  this  kind  not  in  current  use  shall  not 
be  valued  at  more  than  their  nominal  or  scrap  value. 

(2)  Amounts  expended  in  the  past  for  good  will,  trade-marks, 
trade  brands,  franchises,  and  other  intangible  assets  of  a  like  charac- 
ter, are  controlled  by  the  language  of  the  statute  which  provides 
that  such  assets  "shall  be  included  in  invested  capital  if  the  corpora- 
tion or  partnership  made  payment  bona  fide  therefor  specifically  as 
such  in  cash,  or  tangible  property."  The  Commissioner  of  Internal 
Revenue  will  recognize  additions  to  invested  capital  on  account  of 
intangible  assets  only  if  such  assets  have  been  explicitly  paid  for  in 
the  manner  prescribed  by  the  statute.  Where  expenditures  have 
been  made  for  the  general  development  of  intangible  assets,  and 
charged  as  current  expense,  no  readjustment  thereof  will  be  allowed. 

(3)  Amounts  under  (1)  and  (2)  above,  expended  on  or  after 
March  1,  1913,  will,  in  the  case  of  a  corporation,  be  limited  strictly 
to  items  which  have  not  been  deducted  in  computing  taxable  in- 
come upon  its  income  tax  return.  Whenever  a  corporation  has 
claimed  and  the  department  has  allowed  a  deduction  in  respect 
to  its  income  tax,  the  item  upon  which  the  deduction  is  based  shall 
not  be  restored  to  the  surplus  account  nor  included  in  the  invested 
capital. 

(4)  The  taxpayer  shall  in  his  return  to  the  Commissioner  of  In- 
ternal Revenue  make  a  statement  of  the  proposed  additions,  specify- 
ing the  kinds  and  amounts  of  property  involved,  the  years  in  which 
the  expenditures  were  made,  and  the  method  followed  in  distin- 
guishing between  capital  outlays  and  current  expenses. 

(5)  The  taxpayer  shall  also  show  that  adequate  provision  has 
been  made  for  the  depletion,  depreciation,  or  obsolescence  of  such 
of  the  assets  so  acquired  as  are,  under  the  rulings  of  the  department, 
subject  to  recognized  depreciation. 

Art.  65.  Invested  capital  of  insurance  companies. —  (a)  The  in- 
vested capital  of  a  mutual  insurance  company  will  be  deemed  to 
consist  of  the  sum  of  (1)  any  surplus  or  contingent  reserves  main- 
tained for  the  general  use  of  the  business,  plus  (2)  any  legal  re- 
serves, the  net  additions  to  which  are  included  in  the  net  income 
subject  to  the  tax — subject  to  the  restrictive  provisions  of  article  44 
requiring  the  exclusion  of  tax-free  assets  other  than  obligations  of 
the  United  States. 


30  WAR  EXCESS  PROFITS  TAX 

(b)  The  invested  capital  of  a  stock  insurance  company  will  be 
deemed  to  consist  of  its  capital  stock,  paid  in  or  earned  surplus  and 
undivided  profits  (subject  to  the  same  restrictive  provision  of  art. 
44),  computed  in  accordance  with  the  provisions  of  article  53. 

INVESTED  CAPITAL— INDIVIDUALS. 

Art.  66.  Items  included  in  invested  capital. — Subject  to  the 
limitations  stated  in  these  regulations  the  invested  capital  of  an  in- 
dividual is  measured  by  the  total  of  three  items : 

(1)  Actual  cash  paid  into  the  trade  or  business, 

(2)  Tangible  property  paid  into  the  trade  or  business, 

(3)  Patents  and  copyrights,  and  good  will,  trade-marks,  trade- 
brands,     franchises,  and  other  intangible  property.   (See  art.  68.) 

Art.  67.  Valuation  of  tangible  property. — Subject  to  the  require- 
ments of  article  42  as  to  allowance  for  depletion,  depreciation,  and 
obsolescence,  valuation  of  tangible  property  will  be  as  follows : 

In  the  case  of  tangible  property  purchased  with  cash,  the  valua- 
tion will  be  based  upon  the  cost  (estimated  if  not  known)  in  cash  at 
the  time  purchased. 

In  the  case  of  tangible  property  paid  in  as  such  prior  to  January 
1,  1914,  the  valuation  will  be  based  upon  its  actual  cash  value  as  of 
that  date.  Adequate  evidence  of  such  value  must  be  furnished  by 
the  taxpayer. 

In  the  case  of  tangible  property  paid  in  on  or  after  January  1, 
1914,  the  valuation  will  be  based  upon  its  actual  cash  value  at  the 
time  of  payment. 

It  will  be  presumed  that  the  tangible  assets  employed  in  the  trade 
or  business  have  been  acquired  with  cash  which  has  been  either 
paid  in  directly  or  derived  from  earnings  of  the  trade  or  business; 
but  the  taxpayer  will  be  entitled  to  show  that  such  assets  were  paid 
in  as  tangible  property. 

Art.  68.  Valuation  of  intangible  property. — Patents  and  copy- 
rights, and  good  will,  trade-marks,  trade-brands,  franchises,  and 
other  similar  intangible  assets  may  be  included  in  invested  capital 
at  a  value  not  to  exceed  the  actual  cash  paid  therefor  or  the  actual 
cash  value  at  the  time  of  payment  of  the  tangible  property  paid 
therefor,  but  only  if  bona  fide  payment  was  made  therefor  specific- 
ally as  such  in  rash  or  tangible  property. 

Art.  69.  Profits  earned  during  taxable  year  may  be  included. — 
The  restriction  in  respect  of  undivided  profits  earned  during  the 
taxable  year  which  is  imposed  upon  corporations  and  partnerships 


WAR  EXCESS  PROFITS  TAX  31 

does  not  apply  to  individuals,  and  therefore,  unless  otherwise 
shown,  the  profits  of  the  taxable  year  remaining  in  the  trade  or 
business  will  be  deemed  to  have  arisen  ratably  throughout  the 
year,  and  the  capital  at  the  beginning  of  the  year  may  be  increased 
by  the  total  amount  of  such  profits  remaining  in  the  trade  or  busi- 
ness ayeraged  monthly  over  the  year. 

Art.  70.  Rule  for  computing  invested  capital. — Where  an  individ- 
ual keeps  books  of  account  his  invested  capital  will  be  found  in 
his  capital  account  (under  whatever  name  it  may  be  called)  after 
making  therein  any  adjustments  or  corrections  required  by  these 
regulations,  provided  that  the  assets  other  than  those  not  allowed  to 
be  included  equal  or  exceed  the  amount  of  such  capital  account. 
Otherwise  the  invested  capital  shall  be  the  amount  of  such  assets. 

Where  an  individual  does  not  keep  books  of  account  he  should 
prepare  and  preserve  a  statement  as  at  the  beginning  of  the  taxable 
year  and  as  at  the  end  of  the  taxable  year,  showing  in  full  all  his 
assets  valued  in  accordance  with  these  regulations,  and  all  his 
liabilities.  The  excess  of  such  assets  over  such  liabilities  at  the 
beginning  of  the  year  and  again  at  the  end  of  the  year  will  constitute 
the  invested  capital  of  the  individual  on  those  dates,  respectively, 
provided,  that  in  each  case  the  assets  other  than  those  not  allowed  to 
be  included  equal  or  exceed  the  amount  of  such  excess.  Otherwise 
the  invested  capital  shall  be  the  amount  of  such  assets.  The  amount 
of  the  difference  between  the  capital  thus  shown  as  at  the  beginning 
of  the  year  and  at  the  end  of  the  year  will,  in  the  absence  of  evi- 
dence to  the  contrary,  be  deemed  to  have  arisen  ratably  throughout 
the  year,  and  the  capital  at  the  beginning  of  the  year  will  be  in- 
creased or  decreased,  as  the  case  may  be,  by  such  amount  averaged 
monthly  over  the  year. 

If  an  individual  is  engaged  in  more  than  one  trade  or  business 
having  invested  capital,  then  his  invested  capital  for  the  purposes 
of  computing  the  deduction  and  applying  the  rates  of  taxation  will 
be  determined  by  taking  the  total  invested  capital  of  all  such  trades 
or  businesses. 

The  terms  "assets"  and  "liabilities"  as  used  in  this  article  relate 
only  to  the  assets  or  liabilities  of  the  trade  or  business. 


32  WAR  EXCESS  PROFITS  TAX 

NOMINAL  CAPITAL. 

Art.  71.  Application  of  section  209. — Section  209  (See  art.  15)  ap- 
plies primarily  to  occupations,  professions,  trades,  and  businesses 
engaged  principally  in  rendering  personal  service  in  which  the  em- 
ployment of  capital  is  not  necessary  and  the  earnings  of  which  are 
to  be  ascribed  primarily  to  the  activities  of  the  owners. 

In  determining  whether  a  trade  or  business  is  taxable  under 
article  15  no  weight  will  be  given  to  the  fact  that  it  is  carried  on  by 
means  of  personal  service  unless  the  principal  owners  are  regularly 
engaged  in  the  active  conduct  of  the  trade  or  business. 

Art.  72.  Application  of  section  209  not  to  be  affected  by  mere  size 
of  capital,  form  of  organization,  etc. — Business  concerns  which  ren- 
der professional  or  personal  service  and  are  of  the  class  normally 
taxable  under  article  15  shall  not  be  taken  out  of  that  class  merely 
because  of  the  size  of  the  capital  if  the  employment  of  such  capital 
is  necessitated  by  delay  and  irregularity  in  the  receipt  of  fees,  etc., 
or  if  such  capital  is  wholly  or  mainly  used  as  a  fund  from  which 
to  advance  salaries,  wages,  etc.,  or  to  provide  office  furniture,  ac- 
commodations, and  equipment,  nor  because  of  the  form  of  organi- 
zation, whether  corporation  or  partnership,  nor  in  the  case  of  a 
partnership  because  of  the  number  of  partners. 

Art.  73.  Agents  and  brokers. — Agents  and  brokers  requiring  and 
using  no  capital  or  merely  a  nominal  capital  in  their  business  are 
taxable  under  article  15,  but  commission  houses  regularly  employ- 
ing a  substantial  amount  of  capital,  whether  to  lend  to  principals 
or  to  carry  goods  on  their  own  account,  are  not  deemed  to  be  agents 
or  brokers  and  are  taxable  under  the  provisions  of  article  16. 

Art.  74.  Meaning  of  "nominal  capital" ;  businesses  which  will  not 
be  deemed  to  have  nominal  capital. — The  term  "nominal  capital"  as 
used  in  section  209  means  in  general  a  small  or  negligible  capital 
whose  use  in  a  particular  trade  or  business  is  incidental.  The  fol- 
lowing will  not  be  construed  as  businesses  having  a  nominal  capital 
for  purposes  of  excess  profits  tax : 

(a)  A  business  which  because  of  conditions  arising  from  the  war 
or  exceptional  opportunities  for  profits  earns  a  disproportionately 
high  rate  of  profit  during  the  taxable  year,  if  it  belongs  to  a  class 
which  necessarily  and  customarily  requires  capital  for  its  operation. 
In  the  determination  of  doubtful  cases  stress  will  be  laid  upon  the 
normal  relation  of  net  income  to  capital  during  prewar  years; 


WAR  EXCESS  PROFITS  TAX  33 

(b)  Corporations  which,  although  their  capitalization  is  nominal, 
employ  a  substantial  amount  of  capital  in  their  business; 

(c)  A  business  having  a  substantial  capital,  but  whose  invested 
capital  within  the  meaning  of  section  207  is  reduced  to  a  nominal 
amount  by  the  operation  of  the  restrictive  clauses  of  that  section, 
e.  g.,  where  the  capital,  consisting  originally  of  a  small  amount  of 
cash  paid  in,  has  since  appreciated  in  value,  or  where  the  capital  is 
largely  covered  by  indebtedness  or  consists  principally  of  tax-free 
securities  or  of  intangible  assets  built  up  or  developed  by  expendi- 
tures which  have  been  regularly  deducted  as  items  of  current  ex- 
pense. 

RETURNS. 

Art.  75.  When  a  return  of  information  as  to  the  invested  capital 
and  net  income  for  the  prewar  period  will  not  be  required. — For  the 

purposes  of  the  excess  profits  tax,  a  return  of  information  with 
respect  to  the  invested  capital  and  net  income  for  the  prewar  period 
will  not  be  required  of  a  corporation,  partnership,  or  individual  in 
the  following  cases : 

(1)  If  the  taxpayer  accepts  the  minimum  percentage,  viz.,  7  per 
cent,  as  the  percentage  to  be  used  in  computing  the  deduction  under 
article  21 ;  or 

(2)  If  the  trade  or  business  is  taxable  only  at  the  8  per  cent  rate 
under  article  15. 

This  article  must  not  be  construed  as  not  requiring  a  return  of 
information  as  to  all  facts  which  may  be  necessary  for  the  ascertain- 
ment of  the  capital  and  income  for  the  taxable  year  whenever  such  a 
return  is  required  by  the  Commissioner  of  Internal  Revenue. 

Art.  76.  A  married  woman  may  make  separate  return. — A  mar- 
ried woman  who  is  a  sole  trader  or  is  entitled  to  any  taxable  in- 
come to  her  sole  and  separate  use  may,  for  purposes  of  the  excess- 
profits  tax,  make  a  separate  return  in  the  same  manner  as  any  other 
individual. 

Art.  77.  When  affiliated  corporations  must  furnish  information  as 
to  intercorporate  relations. — For  the  purpose  of  the  excess  profits 
tax  every  corporation  will  describe  in  its  return  all  its  intercorporate 
relationships  with  other  corporations  with  which  it  is  affiliated,  and 
will  furnish  such  information  in  relation  thereto  as  will  enable  the 
Commissioner  of  Internal  Revenue  to  compute  the  amount  of  the 
tax  properly  due  from  each  corporation  on  the  basis  of  an  equitable 
and  lawful  accounting. 

For  the  purpose  of  this  regulation  two  or  more  corporations  will 
be  deemed  to  be  affiliated    (1)    when   one   such  corporation  owns 


34  WAR  EXCESS  PROFITS  TAX 

directly  or  controls  through  closely  affiliated  interests  or  by  a  nom- 
inee or  nominees,  all  or  substantially  all  of  the  stock  of  the  other  or 
others,  or  when  substantially  all  of  the  stock  of  two  or  more  corpor- 
ations is  owned  by  the  same  individual  or  partnership,  and  both  or 
all  of  such  corporations  are  engaged  in  the  same  or  a  closely  related 
business ;  or  (2)  when  one  such  corporation  (a)  buys  from  or  sells 
to  another  products  or  services  at  prices  above  or  below  the  current 
market,  thus  effecting  an  artificial  distribution  of  profits,  or  (b)  in 
any  way  so  arranges  its  financial  relationships  with  another  cor- 
poration as  to  assign  to  it  a  disproportionate  share  of  net  income 
or  invested  capital. 

Art.  78.  When  affiliated  corporations  may  be  required  to  make 
consolidated  return. — Whenever  necessary  to  more  equitably  deter- 
mine the  invested  capital  or  taxable  income,  the  Commissioner  of 
Internal  Revenue  may  require  corporations  classed  as  affiliated 
under  article  77  to  furnish  a  consolidated  return  of  net  income  and 
invested  capital.  Where  such  consolidated  return  is  required  it  may 
be  made  by  any  one  or  more  of  such  corporations  or  by  all  of  them 
acting  jointly ;  but  if  such  affiliated  corporations,  when  requested  to 
file  such  consolidated  return,  neglect  or  refuse  to  do  so,  the  Com- 
missioner of  Internal  Revenue  may  cause  an  examination  of  the 
books  of  all  such  corporations  to  be  made  and  a  consolidated  state- 
ment to  be  made  from  such  examination.  In  cases  where  consoli- 
dated returns  are  accepted,  the  total  tax  will  be  computed  in  the 
first  instance  as  a  unit  upon  the  basis  of  the  consolidated  return  and 
will  be  assessed  upon  the  respective  affiliated  corporations  in  such 
proportions  as  may  be  agreed  among  them.  If  no  such  agreement  is 
made  the  tax  will  be  assessed  upon  each  such  corporation  in  accord- 
ance with  the  net  income  and  invested  capital  properly  assignable 
to  it. 

ASSIGNMENT  AND  COLLECTION. 

Art.  79.  Assessment  and  collection  governed  by  income  tax  regu- 
lations.— All  excess  profits  taxes  to  which  any  taxpayer  is  subject 
shall  be  assessed  and  collected  at  the  same  times  and  in  the  same 
manner  as  provided  with  respect  to  income  taxes  in  the  income  tax 
regulations  in  so  far  as  the  same  are  applicable. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
Approved : 

W.  G.  McADOO, 

Secretary  of  the  Treasury. 


WAR  EXCESS  PROFITS  TAX  35 

APPENDIX. 

(Public,  No.  50,  65th  Congress— H.  R  4280.) 

AN  ACT  To  provide  revenue  to  defray  war  expenses,  and  for  other  purposes. 

******* 

Title  II.— War  Excess  Profits  Tax. 

Sec.  200.     That  when  used  in  this  title — 

The  term  "corporation"  includes  joint-stock  companies  or  associations  and 
insurance  companies; 

The  term  "domestic"  means  created  under  the  law  of  the  United  States, 
or  of  any  State,  Territory,  or  District  thereof,  and  the  term  "foreign"  means 
created  under  the  law  of  any  other  possession  of  the  United  States  or  of 
any  foreign  country  or  government; 

The  term  "United  States"  means  only  the  States,  the  Territories  of  Alaska 
and  Hawaii,  and  the  District  of  Columbia; 

The  term  "taxable  year"  means  the  twelve  months  ending  December 
thirty-first,  excepting  in  the  case  of  a  corporation  or  partnership  which  has 
fixed  its  own  fiscal  year,  in  which  case  it  means  such  fiscal  year.  The  first 
taxable  year  shall  be  the  year  ending  December  thirty-first,  nineteen  hun- 
dred and  seventeen,  except  that  in  the  case  of  a  corporation  or  partnership 
which  has  fixed  its  own  fiscal  year,  it  shall  be  the  fiscal  year  ending  during 
the  calendar  year  nineteen  hundred  and  seventeen.  If  a  corporation  or 
partnership,  prior  to  March  first,  nineteen  hundred  and  eighteen,  makes  a 
return  covering  its  own  fiscal  year,  and  includes  therein  the  income  re- 
ceived during  that  part  of  the  fiscal  year  falling  within  the  calendar  year 
nineteen  hundred  and  sixteen,  the  tax  for  such  taxable  year  shall  be  that 
proportion  of  the  tax  computed  upon  the  net  income  during  such  full  fiscal 
year  which  the  time  from  January  first,  nineteen  hundred  and  seventeeen, 
to  the  end  of  such  fiscal  year  bears  to  the  full  fiscal  year;  and 

The  term  "prewar  period"  means  the  calendar  years  nineteen  hundred  and 
eleven,  nineteen  hundred  and  twelve,  and  nineteen  hundred  and  thirteen,  or, 
if  a  corporation  or  partnership  was  not  in  existence  or  an  individual  was 
not  engaged  in  a  trade  or  business  during  the  whole  of  such  period,  then  as 
many  of  such  years  during  the  whole  of  which  the  corporation  or  partner- 
ship was  in  existence  or  the  individual  was  engaged  in  the  trade  or  business. 

The  terms  "trade"  and  "business"  include  professions  and  occupations. 

The  term  "net  income"  means  in  the  case  of  a  foreign  corporation  or 
partnership  or  a  nonresident  alien  individual,  the  net  income  received  from 
sources  within  the  United  States. 

Sec.  201.  That  in  addition  to  the  taxes  under  existing  law  and  under  this 
act  there  shall  be  levied,  assessed,  collected,  and  paid  for  each  taxable  year 
upon  the  income  of  every  corporation,  partnership,  or  individual,  a  tax 
(hereinafter  in  this  title  referred  to  as  the  tax)  equal  to  the  following  per- 
centages of  the  net  income: 

Twenty  per  centum  of  the  amount  of  the  net  income  in  excess  of  the 
deduction  (determined  as  hereinafter  provided)  and  not  in  excess  of  fifteen 
per  centum  of  the  invested  capital  for  the  taxable  year. 

Twenty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of 
fifteen  per  centum  and  not  in  excess  of  twenty  per  centum  of  such  capital; 

Thirty-five   per   centum   of  the   amount   of  the   net    income   in   excess   of 


36  WAR  EXCESS  PROFITS  TAX 

twenty  per  centum  and  not  in  excess  of  twenty-five  per  centum  of  such 
capital; 

Forty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of 
twenty-five  per  centum  and  not  in  excess  of  thirty-three  per  centum  of  such 
capital;  and 

Sixty  per  centum  of  the  amount  of  the  net  income  in  excess  of  thirty- 
three  per  centum  of  such  capital. 

For  the  purpose  of  this  title  every  corporation  or  partnership  not  exempt 
under  the  provisions  of  this  section  shall  be  deemed  to  be  engaged  in  busi- 
ness, and  all  the  trades  and  businesses  in  which  it  is  engaged  shall  be  treated 
as  a  single  trade  or  business,  and  all  its  income  from  whatever  source  de- 
rived shall  be  deemed  to  be  received  from  such  trade  or  business. 

This  title  shall  apply  to  all  trades  or  businesses  of  whatever  description, 
whether  continuously  carried  on  or  not,  except — 

(a)  In  the  case  of  officers  and  employees  under  the  United  States,  or  any 
State  Territory,  or  the  District  of  Columbia,  or  any  local  subdivision  there- 
of, the  compensation  or  fees  received  by  them  as  such  officers  or  employees; 

(b)  Corporations  exempt  from  tax  under  the  provisions  of  section  eleven 
of  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen, 
as  amended  by  this  Act,  and  partnerships  and  individuals  carrying  on  or 
doing  the  same  business,  or  coming  within  the  same  description;  and 

(c)  Incomes  derived  from  the  business  of  life,  health,  and  accident  insur- 
ance combined  in  one  policy  issued  on  the  weekly  premium  payment  plan. 

Sec.  202.  That  the  tax  shall  not  be  imposed  in  the  case  of  the  trade  or 
business  of  a  foreign  corporation  or  partnership  or  a  nonresident  alien  in- 
dividual, the  net  income  of  which  trade  or  business  during  the  taxable  year 
is  less  than  $3,000. 

Sec.  203.  That  for  the  purposes  of  this  title  the  deduction  shall  be  as 
follows,  except  as  otherwise  in  this  title  provided — 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1)  an  amount  equal 
to  the  same  percentage  of  the  invested  capital  for  the  taxable  year  which 
the  average  amount  of  the  annual  net  income  of  the  trade  or  business  during 
the  prewar  period  was  of  the  invested  capital  for  the  prewar  period  (but  not 
less  than  seven  or  more  than  nine  per  centum  of  the  invested  capital  for  the 
taxable  year),  and  (2)  $3,000; 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resident  of  the 
United  States,  the  sum  of  (1)  an  amount  equal  to  the  same  percentage  of 
the  invested  capital  for  the  taxable  year  which  the  average  amount  of  the 
annual  net  income  of  the  trade  or  business  during  the  prewar  period  was  of 
the  invested  capital  for  the  prewar  period  (but  not  less  than  seven  or  more 
than  nine  per  centum  of  the  invested  capital  for  the  taxable  year),  and  (2) 
$6,000; 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  nonresident 
alien  individual,  an  amount  ascertained  in  the  same  manner  as  provided  in 
subdivisions  (a)  and  (b)  without  any  exemption  of  $3,000  or  $6,000; 

(d)  Tf  the  Secretary  of  the  Treasury  is  unable  satisfactorily  to  determine 
the  average  amount  of  the  annual  net  income  of  the  trade  or  business  dur- 
ing the  prewar  period,  the  deduction  shall  be  determined  in  the  same  manner 
as  provided  in  section  two  hundred  and  five. 

Sec.  204.  That  if  a  corporation  or  partnership  was  not  in  existence,  or  an 
individual  was  not  engaged   in   the  trade  or  business,  during  the   whole  of 


WAR  EXCESS  PROFITS  TAX  37 

any  one  calendar  year  during  the  prewar  period,  the  deduction  shall  be  an 
amount  equal  to  eight  per  centum  of  the  invested  capital  for  the  taxable 
year,  plus  in  the  case  of  a  domestic  corporation  $3,000,  and  in  the  case  of  a 
domestic  partnership  or  a  citizen  or  resident  of  the  United  States  $6,000. 

A  trade  or  business  carried  on  by  a  corporation,  partnership,  or  individual, 
although  formerly  organized  or  reorganized  on  or  after  January  second, 
nineteen  hundred  and  thirteen,  which  is  substantially  a  continuation  of  a 
trade  or  business  carried  on  prior  to  that  date,  shall,  for  the  purposes  of  this 
title,  be  deemed  to  have  been  in  existence  prior  to  that  date,  and  the  net 
income  and  invested  capital  of  its  predecessor  prior  to  that  date  shall  be 
deemed  to  have  been  its  net  income  and  invested  capital. 

Sec.  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint  finds 
either  (1)  that  during  the  prewar  period  a  domestic  corporation  or  partner- 
ship, or  a  citizen  or  resident  of  the  United  Staes,  had  no  net  income  from 
the  trade  or  business,  or  (2)  that  during  the  prewar  period  the  percentage, 
which  the  net  income  was  of  the  invested  capital,  was  low  as  compared  with 
the  percentage,  which  the  net  income  during  such  period  of  representative 
corporations,  partnerships,  and  individuals,  engaged  in  a  like  or  similar 
trade  or  business,  was  of  their  invested  capital,  then  the  deduction  shall  be  the 
sum  of  (1)  an  amount  equal  to  the  same  percentage  of  its  invested  capital 
for  the  taxable  year  which  the  average  deduction  (determined  in  the  same 
manner  as  provided  in  section  two  hundred  and  three,  without  including 
the  $3,000  or  $6,000  therein  referred  to)  for  such  year  of  representative  cor- 
porations, partnerships,  or  individuals,  engaged  in  a  like  or  similar  trade  or 
business,  is  of  their  average  invested  capital  for  such  year  plus  (2)  in  the 
case  of  a  domestic  corporation  $3,000  and  in  the  case  of  a  domestic  partner- 
ship or  a  citizen  or  resident  of  the  United  States  $6,000. 

The  percentage  which  the  net  income  was  of  the  invested  capital  in  each 
trade  or  business  shall  be  determined  by  the  Commissioner  of  Internal 
Revenue,  in  accordance  with  regulations  prescribed  by  him,  with  the  approval 
of  the  Secretary  of  the  Treasury.  In  the  case  of  a  corporation  or  partner- 
ship which  has  fixed  its  own  fiscal  year,  the  percentage  determined  by  the 
calendar  year  ending  during  such  fiscal  year  shall  be  used. 

(b)  The  tax  shall  be  assessed  upon  the  basis  of  the  deduction  determined 
as  provided  in  section  two  hundred  and  three,  but  the  taxpayer  claiming  the 
benefit  of  this  section  may  at  the  time  of  making  the  return  file  a  claim  for 
abatement  of  the  amount  by  which  the  tax  so  assessed  exceeds  a  tax  com- 
puted upon  the  basis  of  the  deduction  determined  as  provided  in  this  section. 
In  such  event,  collection  of  the  part  of  the  tax  covered  by  such  claim  for 
abatement  shall  not  be  made  until  the  claim  is  decided,  but  if  in  the  judg- 
ment of  the  Commissioner  of  Internal  Revenue,  the  interests  of  the  United 
States  would  be  jeopardized  thereby  he  may  require  the  claimant  to  give  a 
bond  in  such  amount  and  with  such  sureties  as  the  commissioner  may  think 
wise  to  safeguard  such  interests,  conditioned  for  the  payment  of  any  tax 
found  to  be  due,  with  the  interest  thereon,  and  if  such  bond,  satisfactory 
to  the  commissioner,  is  not  given  within  such  time  as  he  prescribes,  the  full 
amount  of  tax  assessed  shall  be  collected  and  the  amount  overpaid,  if  any, 
shall  upon  final  decision  of  the  application  be  refunded  as  a  tax  erroneously 
or  illegally  collected. 


38  WAR  EXCESS  PROFITS  TAX 

Sec.  206.  That  for  the  purposes  of  this  title  the  net  income  of  a  corpora- 
tion shall  be  ascertained  and  returned  (a)  for  the  calendar  years  nineteen 
hundred  and  eleven  and  nineteen  hundred  and  twelve  upon  the  same  basis 
and  in  the  same  manner  as  provided  in  section  thirty-eight  of  the  Act  en- 
titled "An  Act  to  provide  revenue,  equalize  duties,  and  encourage  the  indus- 
tries of  the  United  States,  and  for  other  purposes,"  approved  August  fifth, 
nineteen  hundred  and  nine,  except  that  income  taxes  paid  by  it  within  the 
year  imposed  by  the  authority  of  the  United  States  shall  be  included;  (b)  for 
the  calendar  year  nineteeen  hundred  and  thirteen  upon  the  same  basis  and 
in  the  same  manner  as  provided  in  section  II  of  the  Act  entitled  "An  Act 
to  reduce  tariff  duties  and  to  provide  revenue  for  the  Government,  and  for 
other  purposes,"  approved  October  third,  nineteen  hundred  and  thirteen, 
except  that  income  taxes  paid  by  it  within  the  year  imposed  by  the  authority 
of  the  United  States  shall  be  included,  and  except  that  the  amounts  received 
by  it  as  dividends  upon  the  stock  or  from  the  net  earnings  of  other  corpora- 
tions, joint-stock  companies  or  associations,  or  insurance  companies,  subject 
to  the  tax  imposed  by  section  II  of  such  Act  of  October  third,  nineteen 
hundred  and  thirteen,  shall  be  deducted;  and  (c)  for  the  taxable  year  upon 
the  same  basis  and  in  the  same  manner  as  provided  in  Title  I  of  the  Act 
entitled  "An  Act  to  increase  the  revenue,  and  for  other  purposes,"  approved 
September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act, 
except  that  the  amounts  received  by  it  as  dividends  upon  the  stock  or  from 
the  net  earnings  of  other  corporations,  joint-stock  companies,  or  associa- 
tions, or  insurance  companies,  subject  to  the  tax  imposed  by  Title  I  of  such 
Act  of  September  eighth,  nineteen  hundred  and  sixteen,  shall  be  deducted. 

The  net  income  of  a  partnership  or  individual  shall  be  ascertained  and 
returned  for  the  calendar  years  nineteen  hundred  and  eleven,  nineteen  hun- 
dred and  twelve,  and  nineteen  hundred  and  thirteen,  and  for  the  taxable 
year,  upon  the  same  basis  and  in  the  same  manner  as  provided  in  Title  I 
of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  as  amended 
by  this  Act,  except  that  the  credit  allowed  by  subdivision  (b)  of  section  five 
of  such  Act  shall  be  deducted.  There  shall  be  allowed  (a)  in  the  case  of 
a  domestic  partnership  the  same  deductions  as  allowed  to  individuals  in 
subdivision  (a)  of  section  five  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen,  as  amended  by  this  Act;  and  (b)  in  the  case  of 
a  foreign  partnership  the  same  deductions  as  allowed  to  individuals  in  sub- 
division (a)  of  section  six  of  such  Act  as  amended  by  this  Act. 

Sec.  207.  That  as  used  in  this  title,  the  term  "invested  capital"  for  any 
year  means  the  average  invested  capital  for  the  year,  as  defined  and  limited 
in  this  title,  averaged  monthly. 

As  used  in  this  title  "invested  capital"  does  not  include  stocks,  bonds 
(other  than  obligations  of  the  United  States),  or  other  assests,  the  income 
from  which  is  not  subject  to  the  tax  imposed  by  this  title  nor  money  or 
other  property  borrowed,  and  means  subject  to  the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in, 
(2)  the  actual  cash  value  of  tangible  property  paid  in  other  than  cash,  for 
stock  or  shares  in  such  corporation  or  partnership,  at  the  time  of  such 
payment  (but  in  case  such  tangible  property  was  paid  in  prior  to  January 
first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of  such  property 
as  of  January  first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed 


WAR  EXCESS  PROFITS  TAX  39 

the  par  value  of  the  original  stock  or  shares  specifically  issued  therefor), 
and  (3)  paid  in  or  earned  surplus  and  undivided  profits  used  or  employed 
in  the  business,  exclusive  of  undivided  profits  earned  during  the  taxable 
year:  Provided,  That  (a)  the  actual  cash  value  of  patents  and  copyrights 
paid  in  for  stock  or  shares  in  such  corporation  or  partnership,  at  the  time 
of  such  payment,  shall  be  included  as  invested  capital,  but  not  to  exceed  the 
par  value  of  such  stock  or  shares  at  the  time  of  such  payment,  and  (b)  the 
good  will,  trade-marks,  trade  brands,  the  franchise  of  a  corporation  or 
partnership,  or  other  intangible  property,  shall  be  included  as  invested 
capital  if  the  corporation  or  partnership  made  payment  bona  fide  therefor 
specifically  as  such  in  cash  or  tangible  property,  the  value  of  such  good 
will,  trade-mark,  trade  brand,  franchise,  or  intangible  property,  not  to  exceed 
the  actual  cash  or  actual  cash  value  of  the  tangible  property  paid  therefor 
at  the  time  of  such  payment;  but  good  will,  trade-marks,  trade  brands, 
franchise  of  a  corporation  or  partnership,  or  other  intangible  property,  bona 
fide  purchased,  prior  to  March  third,  nineteen  hundred  and  seventeen,  for 
and  with  interests  or  shares  in  a  partnership  or  for  and  with  shares  in  the 
capital  stock  of  a  corporation  (issued  prior  to  March  third,  nineteen  hun- 
dred and  seventeen),  in  an  amount  not  to  exceed,  on  March  third,  nineteen 
hundred  and  seventeen,  twenty  per  centum  of  the  total  interests  or  shares 
in  the  partnership  or  of  the  total  shares  of  the  capital  stock  of  the  corpora- 
tion, shall  be  included  in  invested  capital  at  a  value  not  to  exceed  the 
actual  cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue  of  stock 
therefor  not  to  exceed  the  value  of  such  stock; 

(b)  In  the  case  of  an  individual,  (1)  actual  cash  paid  into  the  trade  or 
business,  and  (2)  the  actual  cash  value  of  tangible  property  paid  into  the 
trade  or  business,  other  than  cash,  at  the  time  of  such  payment  (but  in  case 
such  tangible  property  was  paid  in  prior  to  January  first,  nineteen  hundred 
and  fourteen,  the  actual  cash  value  of  such  property  as  of  January  first, 
nineteen  hundred  and  fourteen),  and  (3)  the  actual  cash  value  of  patents, 
copyrights,  good  will,  trade-marks,  trade  brands,  franchises,  or  other  intan- 
gible property,  paid  into  the  trade  or  business,  at  the  time  of  such  payment, 
if  payment  was  made  therefor  specifically  as  such  in  cash  or  tangible  prop- 
erty, not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible  prop- 
erty bona  fide  paid  therefor  at  the  time  of  such  payment. 

In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  nonresident 
alien  individual  the  term  "invested  capital"  means  that  proportion  of  the 
entire  invested  capital,  as  defined  and  limited  in  this  title,  which  the  net 
income  from  sources  within  the  United  States  bears  to  the  entire  net 
income. 

Sec.  208.  That  in  case  of  the  reorganization,  consolidation  or  change  of 
ownership  of  a  trade  or  business  after  March  third,  nineteen  hundred  and 
seventeen,  if  an  interest  or  control  in  such  trade  or  business  of  fifty  per 
centum  or  more  remains  in  control  of  the  same  persons,  corporations,  asso- 
ciations, partnerships,  or  any  of  them,  then  in  ascertaining  the  invested 
capital  of  the  trade  or  business  no  asset  transferred  or  received  from  the 
prior  trade  or  business  shall  be  allowed  a  greater  value  than  would  have 
been  allowed  under  this  title  in  computing  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  received, 
unless   such   asset  was   paid   for   specifically  as   such,   in   cash   or   tangible 


40  WAR  EXCESS  PROFITS  TAX 

property,  and  then  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the 
tangible  property  paid  therefor  at  the  time  of  such  payment. 

Sec.  209.  That  in  the  case  of  a  trade  or  business  having  no  invested 
capital  or  not  more  than  a  nominal  capital  there  shall  be  levied,  assessed, 
collected  and  paid,  in  addition  to  the  taxes  under  existing  law  and  under 
this  Act,  in  lieu  of  the  tax  imposed  by  section  two*  hundred  and  one,  a  tax 
equivalent  to  eight  per  centum  of  the  net  income  of  such  trade  or  business 
in  excess  of  the  following  deductions;  In  the  case  of  a  domestic  corporation 
$3,000,  and  in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident 
of  the  United  States  $6,000;  in  the  case  of  all  other  trades  or  business,  no 
deduction. 

Sec.  210.  That  if  the  Secretary  of  the  Treasury  is  unable  in  any  case 
satisfactorily  to  determine  the  invested  capital,  the  amount  of  the  deduction 
shall  be  the  sum  of  (1)  an  amount  equal  to  the  same  proportion  of  the  net 
income  of  the  trade  or  business  received  during  the  taxable  year  as  the 
proportion  which  the  average  deduction  determined  in  the  same  manner 
as  provided  in  section  two  hundred  and  three,  without  including  the  $3,000 
or  $6,000  therein  referred  to,  for  the  same  calendar  year  of  representative 
corporations,  partnerships,  and  individuals,  engaged  in  a  like  or  similar  trade 
or  business,  bears  to  the  total  net  income  of  the  trade  or  business  received 
by  such  corporations,  partnerships,  and  individuals,  plus  (2)  in  the  case  of 
a  domestic  corporation  $3,000,  and  in  the  case  of  a  domestic  partnership  or 
a  citizen  or  resident  of  the  United  States  $6,000. 

For  the  purpose  of  this  section  the  proportion  between  the  deduction  and 
the  net  income  in  each  trade  or  business  shall  be  determined  by  the  Com- 
missioner of  Internal  Revenue  in  accordance  with  regulations  prescribed 
by  him,  with  the  approval  of  the  Secretary  of  the  Treasury.  In  the  case  of 
a  corporation  or  partnership  which  has  fixed  its  own  fiscal  year,  the  pro- 
portion determined  for  the  calendar  year  ending  during  such  fiscal  year 
shall  be  used. 

Sec.  211.  That  every  foreign  partnership  having  a  net  income  of  $3,000 
or  more  for  the  taxable  year,  and  every  domestic  partnership  having  a  net 
income  of  $6,000  or  more  for  the  taxable  year,  shall  render  a  correct  return 
of  the  income  of  the  trade  or  business  for  the  taxable  year,  setting  forth 
specifically  the  gross  income  for  such  year,  and  the  deductions  allowed  in 
this  title.  Such  returns  shall  be  rendered  at  the  same  time  and  in  the  same 
manner  as  is  prescribed  for  income-tax  returns  under  Title  I  of  such  Act 
of  September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act. 

Sec.  212.  That  all  administrative,  special,  and  general  provisions  of  law, 
including  the  laws  in  relation  to  the  assessment,  remission,  collection,  and 
refund  of  internal-revenue  taxes  not  heretofore  specifically  repealed,  and  not 
inconsistent  with  the  provisions  of  this  title  are  hereby  extended  and  made 
applicable  to  all  the  provisions  of  this  title  and  to  the  tax  herein  imposed, 
and  all  provisions  of  Title  I  of  such  Act  of  September  eighth,  nineteen  hun- 
dred and  sixteen,  as  amended  by  this  Act,  relating  to  returns  and  payment 
of  the  tax  therein  imposed,  including  penalties,  are  hereby  made  applicable 
to  the  tax  imposed  by  this  title. 

Sec.  213.  That  the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  shall  make  all  necessary  regulations  for 
carrying  out  the  provisions  of  this  title,  and  may  require  any  corporation, 


WAR  EXCESS  PROFITS  TAX  41 

partnership,  or  individual,  subject  to  the  provisions  of  this  title,  to  furnish 
him  with  such  facts,  data,  and  information  as  in  his  judgment  are  necessary 
to  collect  the  tax  imposed  by  this  title. 

Sec.  214.  That  Title  II  (sections  two  hundred  to  two  hundred  and  seven, 
inclusive)  of  the  Act  entitled  "An  Act  to  provide  increased  revenue  to 
defray  the  expenses  of  the  increased  appropriations  for  the  Army  and  Navy, 
and  the  extensions  of  fortifications,  and  for  other  purposes,"  approved 
March  third,  nineteen  hundred  and  seventeen,  is  hereby  repealed. 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  imposed 
by  such  Title  II,  shall  be  credited  toward  the  payment  of  the  tax  imposed 
by  this  title,  and  if  the  amount  so  paid  exceeds  the  amount  of  such  tax  the 
excess  shall  be  refunded  as  a  tax  erroneously  or  illegally  collected. 

Subdivision  (1)  of  section  three  hundred  and  one  of  such  Act  of  Septem- 
ber eighth,  nineteen  hundred  and  sixteen,  is  hereby  amended  so  that  the 
rate  of  tax  for  the  taxable  year  nineteen  hundred  and  seventeen  shall  be 
ten  per  centum  instead  of  twelve  and  one-half  per  centum,  as  therein  pro- 
vided. 

Subdivision  (2)  of  such  section  is  hereby  amended  to  read  as  follows: 

"(2)  This  section  shall  cease  to  be  of  effect  on  and  after  January  first, 
nineteen  hundred  and  eighteen." 

Title  X. — Administrative  Provision. 

******* 

Sec.  1001.  That  all  administrative,  special,  or  stamp  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable, 
are  hereby  extended  to  and  made  a  part  of  this  Act,  and  every  person, 
corporation,  partnership,  or  association  liable  to  any  tax  imposed  by  this 
Act,  or  for  the  collection  thereof,  shall  keep  such  records  and  render,  under 
oath,  such  statements  and  returns,  and  shall  comply  with  such  regulations 
as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  may  from  time  to  time  prescribe. 

******* 

Sec.  1003.  That  in  all  cases  where  the  method  of  collecting  the  tax 
imposed  by  this  Act  is  not  specifically  provided,  the  tax  shall  be  collected 
in  such  manner  as  the  Commissioner  of  Internal  Revenue  with  the  approval 
of  the  Secretary  of  the  Treasury  may  prescribe.  All  administrative  and 
penalty  provisions  of  Title  VIII  of  this  Act,  in  so  far  as  applicable,  shall 
apply  to  the  collection  of  any  tax  which  the  Commissioner  of  Internal 
Revenue  determines  or  prescribes  shall  be  paid  by  stamp. 

Sec.  1004.  That  whoever  fails  to  make  any  return  required  by  this  Act  or 
the  regulations  made  under  authority  thereof  within  the  time  prescribed  or 
who  makes  any  false  or  fraudulent  return,  and  whoever  evades  or  attempts 
to  evade  any  tax  imposed  by  this  Act  or  fails  to  collect  or  truly  to  account 
for  and  pay  over  any  such  tax,  shall  be  subject  to  a  penalty  of  not  more 
than  $1,000,  or  to  imprisonment  for  not  more  than  one  year,  or  both,  at  the 
discretion  of  the  court,  and  in  addition  thereto  a  penalty  of  double  the  tax 
evaded,  or  not  collected,  or  accounted  for  and  paid  over,  to  be  assessed  and 
collected  in  the  same  manner  as  taxes  are  assessed  and  collected,  in  any 
case  in  which  the  punishment  is  not  otherwise  specifically  provided. 

Sec.  1005.   That  the  Commissioner  of  Internal  Revenue,  with  the  approval 


42  WAR  EXCESS  PROFITS  TAX 

of  the  Secretary  of  the  Treasury,  is  hereby  authorized  to  make  all  needful 
rules  and  regulations  for  the  enforcement  of  the  provisions  of  this  Act. 
******* 

Sec.  1008.  That  in  the  payment  of  any  tax  under  this  Act  not  payable  by 
stamp  a  fractional  part  of  a  cent  shall  be  disregarded  unless  it  amounts  to 
one-half  cent  or  more,  in  which  case  it  shall  be  increased  to  one  cent. 

Sec.  1009.  That  the  Secretary  of  the  Treasury,  under  rules  and  regulations 
prescribed  by  him,  shall  permit  taxpayers  liable  to  income  and  excess  profits 
taxes  to  make  payments  in  advance  in  installments  or  in  whole  of  an  amount 
not  in  excess  of  the  estimated  taxes  which  will  be  due  from  them,  and  upon 
determination  of  the  taxes  actually  due  any  amount  paid  in  excess  shall  be 
refunded  as  taxes  erroneously  collected:  Provided,  That  when  payment  is 
made  in  installments  at  least  one-fourth  of  such  estimated  tax  shall  be 
paid  before  the  expiration  of  thirty  days  after  the  close  of  the  taxable  year, 
at  least  an  additional  one-fourth  within  two  months  after  the  close  of  the 
taxable  year,  at  least  an  additional  one-fourth  within  four  months  after  the 
close  of  the  taxable  year,  and  the  remainder  of  the  tax  due  on  or  before  the 
time  now  fixed  by  law  for  such  payment:  Provided  further,  That  the  Secre- 
tary of  the  Treasury,  under  rules  and  regulations  prescribed  by  him,  may 
allow  credit  against  such  taxes  so  paid  in  advance  of  an  amount  not  ex- 
ceeding three  per  centum  per  annum  calculated  upon  the  amount  so  paid 
from  the  date  of  such  payment  to  the  date  now  fixed  by  law  for  such  pay- 
ment; but  no  such  credit  shall  be  allowed  on  payments  in  excess  of  taxes 
determined  to  be  due,  nor  on  payments  made  after  the  expiration  of  four 
and  one-half  months  after  the  close  of  the  taxable  year.  All  penalties  pro- 
vided by  existing  law  for  failure  to  pay  tax  when  due  are  hereby  made  ap- 
plicable to  any  failure  to  pay  the  tax  at  the  time  or  times  required  in  this 
section. 

Sec.  1010.  That  under  rules  and  regulations  prescribed  by  the  Secretary 
of  the  Treasury,  collectors  of  internal  revenue  may  receive,  at  par  and  ac- 
crued interest,  certificates  of  indebtedness  issued  under  section  six  of  the 
Act  entitled  "An  Act  to  authorize  an  issue  of  bonds  to  meet  expenditures 
for  the  national  security  and  defense,  and,  for  the  purpose  of  assisting  in 
the  prosecution  of  the  war,  to  extend  credit  to  foreign  governments,  and 
for  other  purposes,"  approved  April  twenty-fourth,  nineteen  hundred  and 
seventeen,  and  any  subsequent  Act  or  Acts,  and  uncertified  checks  in  pay- 
ment of  income  and  excess-profits  taxes,  during  such  time  and  under  such 
regulations  as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  shall  prescribe;  but  if  a  check  so  received  is 
not  paid  by  the  bank  on  which  it  is  drawn  the  person  by  whom  such  check 
has  been  tendered  shall  remain  liable  for  the  payment  of  the  tax  and  for 
all  legal  penalties  and  additions  the  same  as  if  such  check  had  not  bee» 
tendered. 

General   Provisions. 

Sec.  1212.  That  any  amount  heretofore  withheld  by  any  withholding  agent 
as  required  by  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred 
and  sixteen,  on  account  of  the  tax  imposed  upon  the  income  of  any  in- 
dividual, a  citizen  or  resident  of  the  United  States,  for  the  calendar  year 
nineteen  hundred  and  seventeen,  except  in  the  cases  covered  by  subdivision 


WAR  EXCESS  PROFITS  TAX  43 

(c)  of  section  nine  of  such  Act,  as  amended  by  this  Act,  shall  be  released 
and  paid  over  to  such  individual,  and  the  entire  tax  upon  the  income  of 
such  individual  for  such  year  shall  be  assessed  and  collected  in  the  manner 
prescribed  by  such  Act,  as  amended  by  this  Act. 

******* 

Sec.  1300.  That  if  any  clause,  sentence,  paragraph,  or  part  of  this  Act  shall 
for  any  reason  be  adjudged  by  any  court  of  competent  jurisdiction  to  be 
invalid,  such  judgment  shall  not  affect,  impair,  or  invalidate  the  remainder 
of  said  Act,  but  shall  be  confined  in  its  operation  to  the  clause,  sentence, 
paragraph,  or  part  thereof  directly  involved  in  the  controversy  in  which 
such  judgment  shall  have  been  rendered. 

******* 

Sec.  1302.  That  unless  otherwise  herein  specially  provided,  this  Act  shall 
take  effect  on  the  day  following  its  passage. 

Approved,  October  3,  1917. 

Effective  October  4,  1917. 


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